Asset purchases should still be appropriate "well into the second half of this year," Federal Reserve Bank of San Francisco President and CEO John C. Williams said Wednesday.
"I see the benefits of our asset purchases continuing to outweigh the costs by a large margin. I expect that continued asset purchases will be appropriate well into the second half of this year," Williams said at a Town Hall in Los Angeles, according to prepared text of remarks released by the Fed.
While he isn't using "a specific unemployment or job-gain threshold in mind for cutting back or ending these purchases," Williams said he wants "convincing evidence of sustained, ongoing improvement in the labor market and economy."
Despite encouraging economic news recently, he said, "it will take more solid evidence to convince me that it's time to trim our asset purchases," so as "not to overreact to what may turn out to be just a blip in the data."
Given Williams' economic forecast, the labor market outlook should "meet the test for substantial improvement" by summer. "If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year."
Williams noted, "tapering our purchases and even ending the purchase program doesn't mean that we are removing all the monetary stimulus that comes from our longer-term securities holdings. Instead, even as we cut back our purchases, we're still adding monetary accommodation and exerting greater downward pressure on interest rates. Economic theory and real-world evidence indicate that it's not the pace at which we buy securities that matters for influencing financial conditions. Rather, it's the size and composition of the assets we hold on our balance sheet. So, even when we stop adding to our portfolio, it doesn't mean we're tightening policy."
The economy, as measured by inflation-adjusted GDP, should grow about 2.5% this year and 3.25% next year, which would help the jobless rate dip "a little below 7 percent by late 2014 and fall below 6½ percent in the middle of 2015," Williams said. Defining "normal" as about 5.50%, a level that he estimated, would be hit in 2016.