Bloomberg News

Williams Says Slowdown Demands ‘Extraordinary’ Fed Vigilance

July 09, 2012

Federal Reserve Bank of San Francisco President John Williams said the U.S. central bank must maintain “extraordinary vigilance” to see if the slowing economy requires additional monetary stimulus.

“If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a speech in Coeur D’Alene, Idaho today. Last month’s decision to extend the so-called Operation Twist program “will probably have a relatively modest impact.”

Recent figures have fanned concern the economic outlook is dimming, with a Labor Department report last week showing employers added fewer workers to payrolls in June than forecast. The employment report may add to the case for more stimulus, after the Fed said last month that it’s “prepared to take further action” to reduce unemployment.

“The pace of growth has been frustratingly slow, and we’ve seen some loss of momentum in recent months,” Williams said at a joint convention of the Idaho, Nevada, and Oregon Bankers Associations. “I expect little progress toward maximum employment over the next year or more.”

The unemployment rate remained unchanged at 8.2 percent last month, while employers added 80,000 people to payrolls, Labor Department figures showed July 6. Economists projected a 100,000 gain, according to the median estimate in a Bloomberg News survey.

Jobs Report

More stimulus will be needed if the economy makes little progress toward maximum employment in the next year, as he expects, Williams told reporters after the speech. The fact that there are more downside risks reduces the potential costs of “making the mistake of being overly aggressive,” he said.

“We’re at that edge of where we’re not really making progress” on reaching maximum employment, Williams told reporters.

“The jobs report was just part of the sequence” that signals a “loss of momentum in the economy,” Williams said.

Still, Williams said he sees a “relatively low probability” of another recession in the world’s largest economy. “I don’t expect a recession” in the U.S. “It would require a significant deterioration.”

Williams today said that the main forces weighing on the outlook are cutbacks in government spending and the European debt crisis. The housing market has started to “show signs of life” while banking conditions are mixed, he said.

Stocks Fall

U.S. stocks fell for a third day as Spain’s 10-year debt yield topped 7 percent, fueling concern the debt crisis is worsening as European finance ministers met to hammer out a bank rescue plan.

The Standard & Poor’s 500 Index lost 0.4 percent to 1,349.62 at 1:25 p.m. in New York and the Stoxx Europe 600 Index fell 0.4 percent. Ten-year Treasury yields fell to 1.52 percent from 1.55 percent late last week.

At its June 19-20 meeting, the policy-setting Federal Open Market Committee expanded a program that extends the average duration of assets on its balance sheet, aiming to lower longer- term borrowing costs and in turn spur hiring.

The Fed bought $2.3 trillion of Treasuries and mortgage debt in a bid to reduce long-term borrowing costs after reducing its benchmark interest rate almost to zero in December 2008.

“These purchases have proven effective in lowering borrowing costs and improving financial conditions,” Williams, 50, said in today’s remarks.

‘Overly Optimistic’

Williams said in response to a question from the audience that the Fed was “overly optimistic” before the housing collapse and recession, when policy makers believed that the natural rate of unemployment was about 4.75 percent. The natural rate in the long run probably will be about 5.5 percent, or about the postwar average, he said.

“The housing boom employed a lot of people who might not otherwise have been easy to employ,” Williams said. “Eventually this economy will get back to normal and eventually we’ll get back to an unemployment rate that’s consistent with the historic experience, it just won’t be quite as low as we thought it would be.”

The so-called fiscal cliff, a total of more than $600 billion in higher taxes and reductions government programs that will take effect in 2013 unless Congress acts, “is a negative thing” for the already weak economy because it is introducing “a lot of uncertainty,” Williams said.

Fiscal Decisions

“It would be good to have that uncertainty removed from the situation,” the regional bank chief said. “We’re talking about coming to significant decisions around fiscal policy right after an election with a lame-duck Congress who will have either the same president or a new one.”

Chicago Fed President Charles Evans today called for more purchases of mortgage bonds, warning that the U.S. economy risks incurring long-term damage from the current level of unemployment if the central bank fails to act aggressively.

Eric Rosengren of Boston said at the same forum in Bangkok that hiring has slowed “fairly noticeably,” a development that may further weaken the world’s largest economy.

Williams is a voting member on the FOMC this year while Rosengren and Evans are not. The San Francisco Fed chief became president of the district bank in March 2011.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

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


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