The extraordinary measures taken by the Fed, since the federal funds rate target was near zero, were “useful,” John Williams, Federal Reserve Bank of San Francisco president, said Friday.
Williams said he expects “an extended period of policy challenges” in the United States, and “developments in monetary economics will be crucial to the future success of monetary policy.”
“The evidence from the experiences of the past few years convincingly demonstrates that both forward guidance and large-scale asset purchases [LSAPs] are useful policy tools when short-term interest rates are constrained by the zero- bound,” Williams told the Swiss National Bank Research Conference, according to a prepared text released by the Fed.
He estimated that LSAPs moved yields 15 to 20 basis points, which he said is the same effect as a 75 basis point cut in the federal funds rate target.
But forward guidance worked, he said. Studies concluded “the Federal Reserve’s policy statements have significant effects on financial market expectations of future policy actions and on Treasury yields.”
When the Fed announced in August that it would keep rates exceptionally low through mid-2013, Williams said: “Two-year Treasury yields fell by about 10 basis points and 10-year Treasury yields fell by about 20 basis points following the announcement. This provides prima facie evidence of the powerful effects of forward guidance at the zero-bound.”