Fed’s Williams Says Taper Path ‘Pretty Much Baked in the Cake’

Federal Reserve Bank of San Francisco President John Williams said the pace at which the Fed is reducing its asset purchases is “pretty much baked in the cake” and that central the bank shouldn’t start raising interest rates until the second half of next year.

“We’re closing in on the final stages of tapering,” Williams told reporters today following a panel discussion in Dallas. “I don’t see a lot of benefit to modifying” the pace unless there’s a “dramatic change” in the economic outlook, he said.

The Federal Open Market Committee, which is buying bonds to hold down long-term interest rates and spur growth, last month announced plans to cut monthly asset purchases by $10 billion, to $45 billion. Fed Chair Janet Yellen told lawmakers this month that the Fed is set to end the program in the fall.

“Given where inflation is and where the labor market is, given the various risks to the outlook, I don’t think it’s appropriate to start raising interest rates until the second half of next year,” Williams said.

The FOMC in April repeated that it will look to a “wide range” of information to determine when to begin raising interest rates. Before the committee’s March gathering, the bank had pledged to keep rates low as long as unemployment was above 6.5 percent and the outlook for inflation didn’t exceed 2.5 percent.

The San Francisco Fed chief, who doesn’t vote on monetary policy this year, said an increase in mortgage rates explains “a good chunk” of the recent slowdown in housing. Household formation hasn’t risen as much as he expected, he added.

Reverse Repo

Williams said the overnight fixed-rate reverse repurchase program, which the central bank has been testing, “should be part of our toolkit” as the Fed begins raising interest rates. “It probably has a lot of value,” he said.

In an interview posted by the George W. Bush Institute today, Williams said he is worried about “the falloff in momentum in the housing rebound.”

“We’re definitely looking at a brighter jobs market, and employment has seen steady progress over the past few years,” he added in the interview.

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