Fed’s Williams Calls QE3 ‘Essential,’

Top US central bank official John Williams stated the Federal Reserve's recent decision to add more stimulus to the economy was essential. They plan on continuing the mortgage-backed securities purchases until the job market looks healthier, and might even expand their purchases to include other assets.

By Michael S. Derby
September 24, 2012, 3:38 PM
Wall Street Journal

Saying the Federal Reserve‘s recent decision to add more stimulus to the economy was essential, a top U.S. central-bank official said Monday his institution could do even more if necessary.

“We will continue buying mortgage-backed securities until the job market looks substantially healthier,” Federal Reserve Bank of San Francisco President John Williams said. “We might even expand our purchases to include other assets,” the policy maker said in the text of a speech prepared for delivery before the City Club of San Francisco.

Mr. Williams, a voting member of the monetary-policy setting Federal Open Market Committee, spoke in the wake of the Fed’s recent decision to launch an open-ended, mortgage-bond-buying program aimed at pushing growth higher. The Fed also extended until mid-2015 its conditional pledge to keep interest rates effectively near zero.

In his speech Monday, Mr. Williams expressed his strong support for the action, and said it should help engineer better growth in an environment where uncertainty, as well as worries over U.S. and European government finance, continue to create headwinds. Mr. Williams noted the Fed’s new effort seeks to exploit a bright spot in the economy.

“Housing is once more showing signs of life,” Mr. Williams said, and lower borrowing costs resulting from the Fed’s new policy stance should help with that process. “With the economy improving, mortgage rates at historically low levels, and homes extraordinarily affordable, confidence is returning to the housing market,” he said.

The official described the new actions taken by the Fed as “a kind of automatic stabilizer for the economy.” Mr. Williams explained if the economy mends faster than predicted, the new mortgage-bond buying could be trimmed or stopped outright. Conversely, if the woes persist, the Fed could do more than it now expects to.

The official said the actions taken by the Fed “are designed to help us achieve both our goals of maximum employment and price stability.” The Fed has room to act because “inflation continues to be low and inflation expectations are low and stable.” That said, even as high unemployment rates are “the bigger problem,” Mr. Williams said “in no way has our commitment to price stability wavered.”

The central banker expects the latest Fed action to have tangible effects on growth. “I expect real gross domestic product to expand at a modest pace of about 1 3/4% this year, but to improve to 2 1/2% growth next year and 3 1/4% in 2014,” he said.

That should lower unemployment, he said, with what is currently a 8.1% unemployment rate easing to 7 1/4% by the close of 2014. The official said compared with where unemployment peaked, there has been “real progress” on lowering unemployment, but he added “we still have quite a way to go to get the economy back to where it should be.”

Mr. Williams sees little to worry about when it comes to price pressures. “I expect inflation to remain slightly below 2% for the next few years as increases in labor costs remain subdued and public inflation expectations stay at low levels,” he said.

The central banker’s optimism was tempered by the factors he sees creating a drag on growth. Mr. Williams worries while inaction on coming tax increases and mandatory spending cuts could send the economy back into recession, “there’s little doubt that a number of austerity measures will hit. I expect that to slow our economy’s forward progress.”

Meanwhile, even as European leaders have bought time to mend their financial system, “it is far from certain that European leaders will succeed in doing so.”

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