Bloomberg News

Fed’s Williams Says Weak Growth Outlook May Need More Easing

November 16, 2011

(Adds comment on Congress supercommittee in eighth paragraph.)

Nov. 15 (Bloomberg) -- Federal Reserve Bank of San Francisco President John C. Williams said the central bank may need to conduct more asset purchases in the face of stubborn unemployment, moderate growth and undesirably low inflation.

“Additional monetary policy accommodation -- either in the form of additional asset purchases or further forward guidance on our future policy intentions -- may be needed to bring us closer to our mandated objectives of maximum employment and price stability,” Williams said in a speech in Scottsdale, Arizona today.

Fed Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee are struggling to combat an unemployment rate stuck near 9 percent or higher for more than 2 1/2 years. The FOMC unveiled new policy tools at its August and September meetings and Bernanke identified additional purchases of mortgage-backed securities as a “viable option” for further easing.

“If economic conditions improve much more rapidly than expected or if inflation shows signs of taking off, we have the tools to tighten monetary policy as needed,” Williams told the Greater Phoenix Chamber of Commerce. “But, I fear the more likely situation is one of continued moderate growth, persistently high unemployment and undesirably low inflation.”

Target Near-Zero

Earlier this month, policy makers left unchanged their plans to lengthen the maturity of the Fed’s bond portfolio, known as Operation Twist, and renewed their pledge to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains “subdued.”

The U.S. economy added 80,000 jobs in October, down from 104,000 in August and 158,000 in September, according to a Nov. 4 report from the Labor Department. The jobless rate fell to 9 percent.

Williams said that negotiations in Washington by the so- called supercommittee to slow the growth of U.S. debt could hurt the economy if cuts take effect too soon.

Cutting too much too quickly “is just going to make it harder for the economy to grow,” Williams said in response to audience questions. “If they did a lot of cutting in the next year that would hurt the economy in the short run.”

“What would be best for the U.S. economy would be not to try to front load this,” he said.

Growth, Unemployment Forecasts

Williams said he forecasts that the economy will grow about 2.25 percent in 2012 and 3 percent in 2013. The unemployment rate will decline to 8.75 percent at the end of 2012 and 8 percent by 2013, he said.

“This is by no means an upbeat forecast,” Williams said, citing research from the San Francisco Fed that the “growth of the productive potential of the U.S. economy has slowed.”

Businesses are no longer making impressive gains in productivity from information and communications technology, he said. “Meanwhile, high unemployment has caused the skill set of the workforce to deteriorate. Taken together, these factors have at least temporarily held down the economy’s natural tendency to expand -- and that’s reflected in my very moderate growth forecast.”

Williams said he saw “the biggest risk” to his forecast coming from Europe’s financial crisis.

Greek Default

“The danger is that losses from a Greek default could spread to other euro area countries, possibly triggering the kind of financial panic we saw in 2008,” he said.

Williams, 49, became president of the San Francisco Fed in March 2011, after 2 years as the bank’s director of research. Fed presidents rotate voting on monetary policy, with Williams voting next year for the first time.

--Editors: Gail DeGeorge, Paul Badertscher

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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


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