Federal Reserve Bank of San Francisco President John Williams said the central bank’s bond- buying will be needed well into 2013, as he urged Fed policy makers to maintain “strong monetary stimulus” to foster economic expansion.
“We need powerful and continuing monetary accommodation to move toward our mandated goals,” Williams said in the text of prepared remarks in New York, referring to the central bank’s mission to achieve maximum employment and price stability. “Purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of this year.”
The Fed affirmed a plan in January to keep buying $85 billion in bonds per month, seeking to bolster growth and reduce unemployment even as some officials are starting to express concern that the program may have unintended consequences. Several participants said the policy-setting Federal Open Market Committee should be prepared to adjust the pace of purchases, according to minutes of the meeting.
“Both the employment and the inflation signals are flashing the same message, and that is that strong monetary stimulus is essential,” said Williams, who is not a voting member of the FOMC this year. Unemployment stood at 7.9 percent last month, while the Fed’s preferred price measure, issued by the Commerce Department and tied to consumer spending, rose 1.3 percent in the 12 months ended December.
After having cut its main interest rate to near zero, the Fed has been experimenting with unprecedented policies to fuel growth. In September, the central bank began its third round of large-scale asset purchases, saying it would buy $40 billion in mortgage bonds per month. The Fed in December expanded the purchases to include a monthly $45 billion in Treasurys.
The FOMC has not said how long it intends to maintain what officials have called an open-ended program, only saying it is waiting for substantial improvement in the labor market.
A number of officials said the costs of their stimulus may prompt them to reduce or end their purchases before the labor market substantially improves, according to minutes of the Jan. 29-30 gathering. “Several others” noted the risks of pulling back the stimulus too soon, the record said.
Williams said that some brighter parts of the economy include the auto and housing industries, adding that those improvements were facilitated by Fed’s record-low interest rates. The job market has been “lackluster” and the unemployment rate probably won’t drop below 6.5 percent — the benchmark the FOMC has given for a possible start for rate increases — until the second half of 2015, he said.
“The Fed’s unemployment-rate threshold can best be understood as a key signal that will help us determine how well we’re moving toward maximum employment,” Williams said. “When we consider when to start raising the federal funds rate, we’ll examine the full range of information about the labor market and broader economic conditions.”
The Fed last month left unchanged its December link between its interest-rate outlook and economic thresholds, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5 percent and if projected inflation doesn’t go beyond 2.5 percent between one and two years in the future.
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