The head of the San Francisco Federal Reserve Bank on Tuesday said he would be open to another of round asset purchases if inflation trends were to fall significantly short of the U.S. central bank's target.
Although he said it would take a big shift in the U.S. economic outlook for the Fed to restart its bond buying, John Williams said the possibility of a new downturn in Europe and other global economic woes pose a risk to the United States.
"If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider," Williams said in an interview with Reuters.
Europe, which faces an elevated risk of a new recession and, according to the International Monetary Fund, a significant chance for an outright bout of deflation, has emerged as a central concern at the Fed.
Though the European Central Bank has acted forcefully to protect the euro zone, "the concern is the next steps that they may need," Williams said. "That worries me a little bit. Will their policy response be as timely and aggressive as needed?"
Despite recent volatility in world financial markets, Williams said he felt investors had a fundamentally correct view of the likely path of Fed policy.
He said he still felt it would likely be appropriate to begin lifting benchmark U.S. rates from zero in the middle of next year. Continued low rates for 10- and 30-year U.S. government bonds do not reflect a market misreading of the Fed's likely policy path, he said, but rather show doubts about the global economy and other issues.
"The markets are pricing in a lot of other things that might happen and a lot of those are negative," Williams said. "The cross currents are really the story."
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