Williams Says Fed Option of Buying More Bonds Is ‘Close Call’
February 08, 2012, 8:30 PM ESTBy Aki Ito and Joshua Zumbrun
Feb. 8 (Bloomberg) -- Federal Reserve Bank of San Francisco President John Williams said the central bank faces a “close call” on whether to buy additional mortgage bonds to spur growth.
“There’s only so much headroom to do further Treasury securities of a medium- or long-term duration,” Williams told reporters after a speech today in San Ramon, California. “But there is more room out there in the mortgage-backed-securities space.”
Williams, a voting member of the policy-setting Federal Open Market Committee this year, echoed Chairman Ben S. Bernanke, who said yesterday he sees a “long way to go” before the job market returns to normal. The Fed chief said on Jan. 25 that bond buying is an option. That day the FOMC extended its pledge to keep interest rates low through at least late 2014.
A third round of bond purchases isn’t a “slam dunk,” Williams, 49, told reporters after speaking to the Bishop Ranch Forum, a group of business leaders. His projection for 2.25 percent economic growth this year, with an unemployment rate likely to remain above 8 percent into next year, isn’t “satisfactory,” he said.
“Just based on the forecast you’d want to boost the economy,” he said, adding that he is in “close-call space” in seeking more stimulus.
“You’d want to weigh the costs and benefits” and new bond purchases will depend “on risks to the forecasts,” Williams said.
The Standard & Poor’s 500 Index was little changed at 1,347.34 at 1:54 p.m. in New York. The yield on the 10-year Treasury note was also little changed at 1.98 percent.
Jobless Rate Fell
The economy added 243,000 jobs last month, Labor Department data showed Feb. 3. That sent the unemployment rate down to 8.3 percent, the lowest since February 2009.
“We may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2 percent,” Williams said today in his speech. “We are very far from maximum employment.”
Some data since the Fed’s meeting last month have painted a mixed outlook for the world’s largest economy. Consumer spending stalled in December as Americans chose to repair their balance sheets, while confidence among households unexpectedly slid in January.
On Jan. 25, while extending its rate pledge to late 2014 from mid-2013, the FOMC cited an “elevated” unemployment rate and “significant downside risks” to the outlook. Bernanke told reporters following the meeting that the Fed is prepared to ease policy if employment doesn’t rebound fast enough or if inflation slows.
Reduce Borrowing Costs
Policy makers’ forecasts for the federal funds rate have helped reduce borrowing costs, Williams said. He said in response to audience questions that he’s “confident” any future efforts by the Fed to remove its record stimulus should have the “desired effect.” Also, asset sales would probably be the final step of such an exit, he said.
The San Francisco Fed president said the U.S. is “clearly on an unsustainable path” of deficits and that fiscal issues are the “biggest” long-term challenge facing the country.
Chicago Fed President Charles Evans called for more accommodative policy Feb. 2, saying the central bank needs a clear low-rate commitment or a third round of bond buying to stimulate the economy.
St. Louis Fed President James Bullard said Feb. 6 the central bank risks “a looming disaster” if it keeps interest rates near zero to counteract a high degree of slack in the U.S. economy. Bullard was the first Fed official in 2010 to call for a second round of asset purchases.
Below 1 Percent
The central bank released policy makers’ projections for the benchmark interest rate for the first time on Jan. 25, with nine of 17 officials expecting borrowing costs to remain below 1 percent at the end of 2014.
Williams has been an early proponent of unveiling the projections. He published a paper with Glenn Rudebusch, currently the director of research at the San Francisco Fed, in 2008 that argued policy makers’ rate projections would help the economy perform better.
Williams became president of the San Francisco Fed in March 2011 after two years as the bank’s director of research.
--With assistance from Vivien Lou Chen in San Ramon, California. Editors: James Tyson, Christopher Wellisz
To contact the reporters on this story: Aki Ito in San Francisco at aito16@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
