In the long-run, Americans need to spend less, save and invest more, as part of a "rebalancing" of the U.S. and Chinese economies, but in the short-run increased consumer spending is "critical" to the U.S. recovery, San Francisco Federal Reserve Bank President John Williams said Friday.

Williams said both consumer and business spending are being hampered by the increased uncertainty and reduced confidence related to budgetary squabbles in Washington.

Williams did not talk directly about monetary policy a week after telling MNI he wants to see "convincing" evidence of "self-reinforcing momentum" in the economy before supporting a reduction of the Fed's large-scale asset purchases.

But his comments did suggest a continued reluctance to reduce monetary stimulus.

"While we need to rebalance our economy away from consumption over the longer term, in the short run, consumer spending is critical to getting the economy moving again," he said in remarks prepared for community leaders in Los Angeles.

That comment came after his observation that "the gridlock and brinkmanship in Washington, D.C., adds to uncertainty and saps confidence."

"This makes households and businesses reluctant to undertake big investments, further slowing the recovery," he added.

Williams' comments about consumer spending came on a day when the Commerce Department reported that personal spending rose a more modest 0.25 in September. That's less than half the pace at which personal income rose.

In October, retailers say their sales are up more than 3% from a year ago. And they are hoping for moderate gains in the coming holiday shopping season. But casting doubt on the prospects for spending are continued declines in consumer confidence. The University of Michigan's consumer sentiment index is down from 73.2 to 72.0 so far in November -- 12.9 points below a year ago.

Much of Williams speech was directed at China, whose economy he noted is slowing because its "model" of export-oriented growth "has become less sustainable."

"The focus must instead shift - as China's leaders have indicated they would like - to domestic household consumption," he said.

Meanwhile, he said the reality for the U.S. is that it cannot continue to run large trade imbalances as it borrows from China and other countries to finance its consumption.

"This reduces our net wealth and makes us more dependent on foreign lenders," he said.

Williams raised concerns about China's dramatic credit expansion and the use to which those loans are being put. He noted that "many observers fear that excessive lending and borrowing may be creating a bubble, similar to the one that burst in the United States just seven years ago."

"China's corporate and household debt as a share of GDP rose 45% in the four years from 2008 to 2012," he said. "This is more than twice the increase in US debt during its credit boom between 2002 and 2008, when the debt-to-GDP ratio rose by about 20 percent."

"Such rapid increases in borrowing have historically raised the risk of crises in other countries," Williams commented.

"Real estate is another area of concern" for China," he said. "(R)ecent data show China's property prices continuing to rise. The resilience of housing prices in the face of concerted policy efforts adds to the worry that a bubble may be forming."

Williams said China has "a fine line to walk: Though a real-estate bubble is a risk, there is also concern that economic growth could weaken too much and too quickly."

"With the rest of the global economy lacking the steam to pull China's economy along, it must find some domestic engine for growth," he added.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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