Federal Reserve Bank of San Francisco President John Williams, emphasizing the need for policy flexibility, said any move to reduce the pace of the central bank’s bond buying could be followed by an increase should the economy weaken again.
“Even if we do adjust downward our purchases, it doesn’t mean we’re now in some autopilot of moving in the same direction,” Williams, 50, said in an interview yesterday in San Francisco. “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back” if the economy weakened.
Fed officials are debating the economic conditions that could prompt them to start slowing their $85 billion in monthly purchases of Treasuries and housing debt. Chairman Ben S. Bernanke yesterday told lawmakers he wants to see “real and sustainable progress” on unemployment, and many Fed officials said more labor-market progress is needed before starting to taper the program, according to minutes of their last meeting.
“We can adjust it down some, watch how things progress from there, and then adjust it again one way or the other,” Williams, who doesn’t vote on monetary policy this year, said at the San Francisco Fed. A slowing or end of the purchases also “doesn’t mean we’re going to start tightening policy anytime soon,” he said.
Stocks and Treasuries dropped yesterday after Bernanke, responding to a question from Representative Kevin Brady, a Texas Republican, said the flow of purchases could be reduced “in the next few meetings” if the Fed is confident gains in the economy are durable. In his testimony to the Joint Economic Committee, Bernanke also warned that a premature end to stimulus would endanger the recovery.
The Standard & Poor’s 500 Index (SPX) slid 0.8 percent yesterday and the benchmark 10-year Treasury yield jumped 11 basis points to 2.04 percent. Stocks extended their losses in today’s trading, with the S&P 500 down 0.4 percent to 1,649.07 as of 1:08 p.m. in New York. The 10-year note yielded 2.03 percent.
Williams’s remarks yesterday underscore policy makers’ caution as they seek ways to eventually end an unprecedented expansion of their balance sheet without undercutting their commitment to support the recovery.
“Because we have this freedom to adjust, how will people interpret it?” he said. “This is uncharted territory.”
Once the Fed does decide to calibrate its bond-buying, its challenge will be to communicate that “these are just adjustments and not strong signals about things going forward,” he added.
Williams was among the first to advocate an open-ended approach to quantitative easing, in which officials specify neither an end-date to the program nor an ultimate amount that they intend to buy. The Fed’s previous two rounds of asset purchases were announced with pre-determined durations and total amounts.
The San Francisco Fed chief last week said the Fed could begin slowing the pace of its purchases as early as this summer and end the program late this year, a forecast that he stressed yesterday was contingent on an economy performing as “hoped and planned.”
“I’m seeing very good signs of improvement, and I want to see even more to be convinced,” he said. He’s looking “for a broad set of indicators that give me confidence that the recovery is on a very solid footing,” he said, citing not only the unemployment rate but also measures like private payroll growth, unemployment claims and the rate at which people quit their jobs.
Jobless claims decreased by 23,000 to 340,000 in the week ended May 18, Labor Department figures showed today. Payrolls grew by 165,000 in April and the unemployment rate fell to a four-year low of 7.5 percent, Labor Department figures showed May 3. The Federal Open Market Committee said May 1 that it will keep buying $85 billion in bonds per month, adding that it’s prepared to accelerate or slow those purchases in response to both the labor market and inflation.
While “the more likely scenario” is for a reduction in the pace of bond-buying, “there’s definitely space if appropriate” to buy bonds at a rate even greater than the current $85 billion, Williams said.
The San Francisco district bank head joined policy makers, including the St. Louis Fed’s James Bullard, who have said a recent slowdown in inflation may complicate the Fed’s decision to moderate and end the bond purchases.
Bullard, speaking in London today, said he is “a little bit nervous about the fact that inflation has been low and has been trending down. I would like to get some reassurance from the data that it’s going to turn around and go back toward target before we start tapering” purchases.
Williams said the recent slowdown in the cost of living will probably be “temporary” and prices will soon rise at a rate closer to the central bank’s 2 percent goal. Inflation was at 1 percent in March, marking the slowest pace since 2009, according to the personal consumption expenditures price index.
“If inflation kept staying low even though these temporary factors played out” or if price expectations started “drifting downward,” that would “definitely go into my thinking about how much accommodation to have,” Williams said.
Williams said that U.S. central bankers may still have “an extra tool” to provide stimulus even after they bring their bond-buying to a close.
“Do we want to normalize the size of the balance sheet over just a few years or could we stretch that out?” he said. “Holding onto the assets for longer would provide further support. Selling them faster would provide less to the economy.”
While the FOMC has pledged to keep its benchmark interest rate near zero as long as unemployment is above 6.5 percent, it may not begin tightening until “well after” the economy reaches that threshold, he said.
“It’s not at all a given that we’d raise rates once we hit” that mark, he said.
The San Francisco Fed chief was an early proponent of releasing policy makers’ projections for the benchmark interest rate, which the Fed started publishing in January 2012. He became president of the San Francisco Fed in March 2011 after two years as the bank’s director of research.
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