Williams Says Fed May Pare Bond Buying in Next Few Months

Federal Reserve Bank of San Francisco President John Williams said quickening economic growth and gains in the job market may prompt the Fed in the next few months to start reducing its $85 billion in monthly bond-buying.

“It’s clear that the labor market has improved since September” when the Fed began its third round of asset purchases, Williams said yesterday in a speech in Portland, Oregon. “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year “if all goes as hoped.”

Williams, who doesn’t vote on policy this year, was one of the first Fed officials to advocate that the central bank buy bonds without setting a limit on the duration or total for such purchases. The Federal Open Market Committee said May 1 that it’s prepared to increase or decrease the size of its monthly bond-buying as officials gauge the health of the economy.

Three other Fed bank presidents called for phasing out monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.

The Dallas Fed’s Richard Fisher said yesterday buying mortgage bonds risks disrupting the market, while Philadelphia’s Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters on May 15 the Fed should “get out of the credit allocation business.”

None of the three presidents holds a policy vote this year, and all have dissented in recent years against decisions to increase stimulus.

Stocks Fall

U.S. stocks fell, pulling benchmark indexes down from records. The Standard & Poor’s 500 Index slipped 0.5 percent to 1,650.47 in New York after reaching records in nine of the 10 previous sessions.

“It was a bit of an overreaction,” said Eric Green, the global head of rates and FX research at TD Securities Inc. in New York. “He’s a non-voter, he’s a relatively new and marginal player in the Fed system, and they were his views alone,” he said, referring to Williams.

Another Fed president, Boston’s Eric Rosengren, said inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth.

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren, who votes on policy this year, said in Milan yesterday. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”

Back-to-Back Declines

A Labor Department report yesterday showed the cost of living fell in April for a second month, the first back-to-back declines in inflation since late 2008, as fuel prices retreated.

The consumer-price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March. Economists surveyed by Bloomberg projected a 0.3 percent drop, according to the median estimate. The so-called core price measure, which excludes more volatile food and energy costs, increased 0.1 percent, less than projected.

Other reports yesterday added to signs the economy is cooling. More Americans than projected filed claims for jobless benefits last week and manufacturing in the Philadelphia region unexpectedly shrank in May.

‘Best Case’

“The expectation of a tapering of QE over the summer is the ‘best case scenario,’ not the most likely scenario,” Thomas Simons, an economist in New York at Jefferies LLC, said in a note to clients, referring to quantitative easing. “We continue to expect the $85 billion per month pace to persist through the end of 2013 before tapering begins in 2014,” he said after release of the speech by Williams.

“Even if we slow the pace of our purchases, it does not mean we would be tightening monetary policy or stepping back from our commitment to provide strong monetary support as the economy recovers,” Williams said.

The FOMC affirmed on May 1 that it will press on with bond buying until achieving substantial improvement in the job market.

The jobless rate will probably fall below 7.5 percent at the end of this year and “a shade below” 7 percent at the end of 2014, Williams said. Real gross domestic product may grow almost 2.5 percent this year and 3.25 percent next year, he said.

“It will take further gains to convince me that the ‘substantial improvement’ test for ending our asset purchases has been met,” the San Francisco Fed chief said. “Assuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer.”

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