Federal Reserve Bank of San Francisco President John Williams said it’s too early to begin slowing the pace of the central bank’s bond purchases, with the benefits outweighing the costs and risks of the record expansion of the Fed’s balance sheet.
“It will take more solid evidence to convince me that it’s time to trim our asset purchases,” Williams said in the text of prepared remarks given in Los Angeles today. “Continued progress depends critically on support from the Federal Reserve.”
Williams, who said bond purchases will probably be needed through late this year, added his voice to those of other Fed bank presidents who are saying that continued stimulus is needed to bring the central bank closer to its goals of full employment and price stability.
Atlanta’s Dennis Lockhart said the Fed will probably need to keep purchasing bonds later into this year or into 2014. James Bullard of St. Louis said the Fed’s policy committee will be in no hurry to slow its asset purchases this year with inflation below its target.
The Federal Open Market Committee in March agreed to keep buying $85 billion in bonds per month, seeking to bolster economic growth and reduce unemployment that was at 7.7 percent in February. Officials are now debating when to begin dialing back the purchases as the economy shows signs of healing.
“I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer,” Williams said in his speech. “If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”
The FOMC began a third round of large-scale asset buying in September, saying that it will keep buying bonds until the labor market substantially improves. Several officials said the Fed should be prepared to vary the pace of asset purchases in response to the economic outlook or a continuing analysis of the benefits and costs to the program, minutes of the Jan. 29-30 meeting showed.
“I see the benefits of our asset purchases continuing to outweigh the costs by a large margin,” Williams said today. “There are still obstacles to our progress, including the effects of budget cuts coming out of Washington and the sluggish recovery plaguing many of our trading partners abroad, especially in Europe.”
The San Francisco Fed chief added that the economy will probably grow 2.5 percent this year and 3.25 percent in 2014, bringing the unemployment rate down to “a little below” 7 percent by late next year.
Williams told reporters after his speech that while he expects job growth of about 200,000 a month in 2014, he’s “not convinced” we’ve seen substantial improvement in labor markets.
“I’m looking for sustained, ongoing improvements” and won’t “get caught up” in short-term fluctuation in the data, he said. The Fed needs to revisit its exit strategy to gain more policy “flexibility” than provided under its current plan, Williams said.
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