Bloomberg News

Williams Says Monetary Policy Must Address Demand ‘Shortfall’

February 28, 2012

Feb. 24 (Bloomberg) -- Federal Reserve Bank of San Francisco President John C. Williams said the housing “bust” is weighing on the U.S. economy and that monetary stimulus is warranted to boost growth.

“Housing is a major factor in the deep downturn and sluggish recovery we’ve experienced in recent years,” Williams said in the text of remarks given at the University of Chicago Booth School of Business’s U.S. Monetary Policy Forum in New York. “It’s one of several factors weighing on aggregate spending by consumers, businesses, and government. An aggregate-demand shortfall is something monetary policy can be, should be, and is addressing.”

The Federal Open Market Committee last month said its key interest rate is likely to stay “exceptionally low” through at least late 2014 to help the recovery gain traction, extending an earlier date of mid-2013. Fed Chairman Ben S. Bernanke said on Jan. 25 that weakness in the housing market was slowing the economic recovery.

Williams, a voting member on the policy-setting FOMC this year, said one challenge for central bankers is that “the monetary transmission mechanism is partially clogged,” making “refinancing and other housing activity less responsive to changes in interest rates.”

If monetary policy is “less powerful than usual,” that “suggests we need to move our monetary instruments even more than usual to achieve our employment and price-stability objectives,” Williams said.

Bond Purchases

Fed officials are keeping open the option of a third round of bond purchases in case the economy weakens or inflation stays low. “A few” members of the FOMC said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or price gains seemed likely to remain lower than the Fed’s 2 percent goal, according to minutes of their Jan. 24-25 meeting released Feb. 15.

The personal consumption expenditures price index rose 2.4 percent for the 12 months ending in December. The Fed last month set a long-term goal of 2 percent inflation and forecast that price increases will fall short of that target this year and next.

Joblessness declined to 8.3 percent in January, the lowest since February 2009, Labor Department data showed on Feb. 3. Payrolls climbed by 243,000, the most in nine months and more than the most optimistic forecast in a Bloomberg News Survey.

Clogged Mechanism

“The partially clogged transmission mechanism could suggest that you don’t do more of everything across the board, but concentrate on policies that affect particular problem areas,” Williams said. “For example, purchases of mortgage- related securities appear to have reduced mortgage rates significantly, making them particularly useful given the weakness in the housing sector.”

Fiscal policies addressing “housing-related headwinds” may also be helpful in boosting the recovery and making “existing monetary stimulus” more “powerful,” Williams said.

Williams forecast on Feb. 8 that the U.S. economy would grow by 2.25 percent this year, slower than the 2.8 percent annual pace in the fourth quarter. He became the San Francisco Fed’s president in March 2011 after two years as the regional bank’s director of research.

Weakness in the housing market “has not been the only factor weighing on aggregate demand” as “fallout from the broader financial crisis” has also damped growth, Williams said.

--Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at

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