Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a policy decision, said “it’s still too early” for the Fed to begin trimming its bond-buying, warning of risks to the economy from low inflation and government budget cuts.
“We need to be sure that the economy can maintain its momentum in the face of ongoing fiscal contraction,” Williams said in a speech today in Rohnert Park, California. “It is also prudent to wait a bit and make sure that inflation doesn’t keep coming in below expectations, possibly signaling a more persistent decline in inflation.”
Bonds (USGG10YR) and stocks have dropped since Chairman Ben S. Bernanke said on June 19 the Fed may dial down $85 billion in monthly bond buying this year and end purchases around mid-2014 should the economy perform in line with its forecast.
“Any adjustments to our purchase program will depend on the new economic data that come in,” said Williams, who doesn’t vote on policy this year. “Reducing or even ending our purchases does not mean the Fed will be tightening monetary policy. Not at all.”
The Standard and Poor’s 500 Index has slid 2.8 percent since June 18, the day before Bernanke outlined the committee’s outlook for the asset-purchasing program. The S&P 500 Index (SPX) fell 0.4 percent today to 1,606.28, while the yield on the 10-year Treasury note rose 0.01 percentage point to 2.49 percent. The yield on the benchmark Treasury increased to 2.61 percent on June 25 as investors anticipated less monetary stimulus.
Speaking to reporters after his speech today, Williams said he backed the timetable for winding down bond purchases that Bernanke outlined on June 19. Williams said as recently as June 3 that the central bank could start trimming its purchases as early as “this summer” and end them by the end of this year if the economy continues to improve. The Federal Open Market Committee plans to meet July 30-31.
Williams said inflation and economic growth have recently been slower than he expected, provoking in him “more angst” about whether the economy will improve with the momentum he had expected, Williams said.
“That argues for somewhat more accommodation than I was expecting back in April or May,” he said. “The chairman articulated where the consensus of the committee is” at the press conference last week.
“The outsized response” in the yields of 10-year Treasuries in recent weeks may have stemmed from complacency and “froth” in the market, Williams said. Some investors expected the Fed to keep quantitative easing and zero interest rates in place for longer than officials were anticipating.
“The market reaction to me probably is a sign that there was complacency and excesses going on,” Williams said. “It’s a good thing that maybe came to an end, or maybe was lessened.”
With markets reeling, several Fed officials in the past week have emphasized that the central bank won’t begin tightening for some time. Atlanta Fed President Dennis Lockhart yesterday said investors may have misread Bernanke’s June 19 comments, adding that policy will stay accommodative.
“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” Fed Governor Jerome Powell said yesterday in Washington.
Markets will probably remain volatile as policy makers debate when and how to curtail the so-called quantitative easing program, Richmond Fed President Jeffrey Lacker said today in a speech in West Virginia.
The reaction by investors since Bernanke’s comments is “evidence that they had built in expectations of more asset purchases than I think the committee taken as a whole was anticipating,” Lacker told reporters after his speech. Recent asset price declines “should not be too surprising,” he said in his speech.
Williams said today he expects the unemployment rate to fall to 7.25 percent at the end of this year and to 6.75 percent by the end of 2014. Joblessness was at 7.6 percent in May.
Inflation will probably accelerate closer to the Fed’s 2 percent goal, to 1.75 percent in 2015 from less than 1.5 percent in the second half of this year, he said.
Investors have closely scrutinized comments by Williams, among the early backers of a third round of bond buying, after he raised the possibility of tapering the program. He had also favored an open-ended approach to the bond purchases, in which the Fed specifies neither the duration nor the total amount of buying.
While a voting member on the FOMC last year, Williams backed the beginning of the third round of assets purchases in September and the decision to expand the program to Treasuries in December.
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