Bloomberg News

Williams Says Fed Has ‘No Magic Wand’ to Strengthen Growth

November 09, 2011

(Updates with Bernanke in third paragraph.)

Nov. 4 (Bloomberg) -- Federal Reserve Bank of San Francisco President John C. Williams said the central bank has no “magic wand” available as it tries to boost economic growth, and U.S. officials need to focus on resolving fiscal challenges.

“We’re working very hard using monetary policy to try to stimulate the economy,” the regional bank chief said today during a panel discussion held in Santa Clara, California. Still, “we don’t have a magic wand at the Federal Reserve,” and political leaders need to “come to an agreement to bring long-term fiscal problems to order,” he said.

The central bank, grappling with unemployment that’s still “far too high,” may take new steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public, Fed Chairman Ben S. Bernanke said after the Federal Open Market Committee’s two-day meeting ended Nov. 2. Williams, 49, is the first Fed official to publicly discuss policy since the gathering.

While one of the Fed’s mandates is achieving full employment, “fiscal policy needs to get the economy going” in the short run, Williams said during the Silicon Valley Leadership group’s annual Public Policy Conference luncheon.

This year’s debate between President Barack Obama and Congress over raising the U.S. debt ceiling had a “huge” impact on confidence, and the inability to solve the U.S. fiscal woes is “holding back” the economy, the policy maker said.

Labor Force Grew

The U.S. jobless rate unexpectedly fell in October while employers added fewer workers than forecast. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent, even as the labor force grew. The 80,000 increase in payrolls followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington.

Fed officials refrained from taking any new steps to ease policy this week, while saying “significant downside risks” remain to the outlook. The committee kept policy unchanged, by saying it would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Policy makers also lowered their economic-growth projections compared with June and said the unemployment rate will decline at a slower pace. Gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior projections, according to the median range of economic projections from the 17 governors and regional Fed presidents.

Previous Forecast

The jobless rate in the fourth quarter of 2012 will range from 8.5 percent to 8.7 percent, up from the previous forecast of 7.8 percent to 8.2 percent, the Fed said in a release separate from the FOMC statement.

Stocks, the euro and Italian bonds fell as a disagreement on boosting the International Monetary Fund’s resources to fight Europe’s debt crisis overshadowed the drop in the U.S. jobless rate.

The Standard & Poor’s 500 Index lost 0.6 percent to close at 1,253.23 in New York, paring a drop of as much as 1.8 percent.

Williams was a senior economist for the Council of Economic Advisers during the Clinton administration. The Sacramento native succeeded Janet Yellen, now the Fed board’s vice chairman, and will become a voting member of the rate-setting FOMC next year.

--With assistance from Joshua Zumbrun and Sho Chandra in Washington. Editors: James L Tyson, Gail DeGeorge

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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