Fed’s Williams Backs Slowing Bond Buying This YearSteve Matthews and Anthony Effinger
Federal Reserve Bank of San Francisco President John Williams, who has backed record stimulus, said he favors a slowing in bond buying later this year as the U.S. economy shows signs of picking up.
Chairman Ben S. Bernanke “laid out a timetable for our securities purchases, which includes reducing them later this year and ending them around the middle of next year, assuming our forecasts for the economy hold true,” Williams, who doesn’t vote on policy this year, said in Portland, Oregon. “I view Chairman Bernanke’s timetable to still be the best course forward.”
Treasury yields hit two-year highs on Aug. 22 amid speculation the Federal Open Market Committee this month will reduce its $85 billion in monthly bond buying. Policy makers are weighing when to begin tapering large-scale asset purchases known as quantitative easing, which they have pledged to maintain until the job market improves substantially.
“The unemployment rate and a number of other labor market indicators, such as payroll job gains, point to continued progress in the labor market,” Williams said to Portland community leaders. “Clearly, we are getting closer to meeting our test of substantial improvement in the labor market.”
Williams told reporters after the meeting he was undecided whether the slowing of asset purchases should begin this month.
“I’m going into this meeting with an open mind,” he said. “I want to see all the pros and cons,” and “my view is that it does depend on the data, the analysis and the forecast.”
While bond buying has been “very helpful” to the economy, it may have contributed to excessive risk-taking in markets, which were restored to some “sanity” when Fed officials starting talking of tapering purchases a few months ago, according to Williams.
“Prudence would call for some caution,” he said. “Unintended consequences are an issue” and “the taper talk may have ended what was starting to become bubble-like behavior.”
In his prepared talk, Williams said the unemployment rate, which dropped to 7.4 percent in July from 10 percent in October 2009, has probably overstated progress in the labor market. Employers probably added 180,000 jobs last month and the jobless rate held at the more than four-year low of 7.4 percent, according to a Bloomberg survey of economists ahead of a government report on Sept. 6.
Even so, unemployment remains the single best “summary statistic” for the labor market and a decline in people participating in the labor force in recent years has been caused mostly by “structural factors,” such as retirement of the U.S. baby boomers, he said.
Inflation has been “running well below our target” of 2 percent, Williams said. While the San Francisco Fed official said he believed such a low level wouldn’t last, he said price levels will also influence the Fed’s bond buying program.
“Any adjustments to our purchases are likely to be part of a multistep gradual process, reflecting the pace of improvement in the economy,” he said.
Responding to audience questions, Williams said if there were a further decline in inflation that warranted additional stimulus, he would favor using communications rather than asset purchases. The FOMC has said it will keep rates near zero at least as long as unemployment is above 6.5 percent and the outlook for inflation is no more than 2.5 percent.
“Forward guidance has proven to be a very effective tool and could be adjusted if we needed more stimulus,” he said.
Even after bond buying ends, interest rates will probably stay near zero until late 2015, “so monetary policy will continue to be extraordinarily stimulative for quite some time,” Williams said earlier in his speech.
The FOMC will probably vote at its Sept. 17-18 meeting to taper the unprecedented stimulus program, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13. The first step may be to taper monthly purchases by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists. They said buying will probably end by mid-2014.
Williams said he expects U.S. growth of about 2 percent this year, accelerating to 3 percent in 2014.
“I’ve been encouraged by the greater optimism I’m hearing from a broad range of business contacts -- people in everything from tourism to commercial real estate -- not just the pockets of strength we’ve seen in the past year or so,” Williams said. “All in all, the private side of the economy has been forging ahead with considerable momentum,” though government spending cuts continue to slow growth.
Reports since the July 30-31 gathering, where the FOMC said that downside risks to the economy have diminished, have suggested the U.S. economy has continued to make gains. Manufacturing expanded in August at the fastest pace in more than two years, the Institute for Supply Management’s factory index showed yesterday.
The district bank chief said in April, May and early June that the central bank could begin reducing the pace of its monthly asset purchases as early as “this summer” if the economy continued to improve. He was an early backer of the Fed’s open-ended approach to quantitative easing, in which the officials would announce neither an ultimate amount of assets they intend to buy nor an end date for the purchases.
Williams, 51, has worked in the Fed system since 1994. He was the reserve bank’s research director before succeeding Janet Yellen as president in 2011, when she became the board’s vice chairman.