The Fed will need to buy mortgage-backed securities and longer-term Treasury securities "well into the second half of 2013," as uncertainty continues to hold back the recovery, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Monday.
"The Fed is missing on both of its goals, especially the maximum-employment mandate," Williams told a group in California, according to prepared text of his remarks, released by the Fed. "And there are risks that the economy will slow further. The implications are clear. The Fed must do what it can to help the economy improve."
The recent fiscal cliff threat and the upcoming battle over the debt ceiling have stymied consumer and business spending, he said. "I anticipate that continued purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of 2013."
The economy should "gradually pick up steam," he said, "But there's a significant risk that growth will fall short of my expectations, especially if further political wrangling over the federal budget leads to prolonged confrontation and uncertainty," he said.
Williams expects GDP to have risen 1.75% in 2012, and 2.50% growth this year, rising to almost 3.50% in 2014, a rate, he said, "sufficient to bring the unemployment rate down gradually over the next few years," although his forecast calls for jobless rates at or above 7% through the end of 2014.
Inflation should stay "somewhat below the Fed's 2 percent target for the next few years as labor costs and import prices remain subdued."
Changing to benchmarks rather than date-driven policy guidance "represents a major improvement," Williams said, since it lets public expectations "naturally adjust as the economic outlook evolves, without people needing to wait for the Fed to signal a change." Also, it give an assurance the Fed "will keep rates low as long as needed to promote recovery and move toward our goals of maximum employment and price stability."
The move, which he called evolutionary rather than revolutionary, still has risks, since "it's impossible to express all the information that goes into monetary policymaking in terms of a few thresholds."
While it is "appropriate" to use employment as a benchmark now, "because high unemployment is our biggest problem right now … in the final analysis, we'll consider all kinds of information about economic conditions to help us decide whether we've made enough progress to start raising interest rates."
While no measures "are cure-alls," Williams said, "our policies are working, as the newfound vigor in the auto and housing markets demonstrates. I am convinced we are charting the best course to get us to maximum employment and price stability."
