The Federal Reserve's monetary policy was on target throughout the recession and recovery San Francisco Federal Reserve Bank President and CEO John C. Williams said Monday.
"Continued accommodation has been absolutely the right stance to take," he said, adding, "it helped us to get where we are today-on the road back to full employment and price stability."
"I am aware that not everyone is a fan of the Fed or of accommodative policy," Williams told the Utah and Montana Bankers Association, according to prepared text released by the Fed. "I'm not deaf to criticism, and reasonable people disagree on policy all the time. But the bottom line is, it has worked. And the asterisk is that it's not permanent. We won't raise interest rates for some time, which is the real marker of tightening policy. However, we've already considerably reduced the pace of our asset purchases, which will likely end this year. We're moving towards normalization, and as the economy continues to improve, we'll take off the cast; when it's able to move on its own, we'll take away the walking stick. The events of the past several years demanded strong policy action, and we were right to take it. But it doesn't reflect a fundamental shift in our goals or strategy."
Williams noted economic improvement, with the notable exception of first-quarter gross domestic product and a "loss of momentum" in the housing recovery.
While the labor force has grown, Williams said, "we would need to surpass pre-recession numbers to get back to a normal labor market." The current unemployment rate of 6.3% remains above Williams' "natural rate" of about 5.25%, so "there's still a way to go before we're at full employment."
Deflecting criticism that the fed should have ended accommodation earlier, Williams said, "Ending accommodative policy prematurely would have been a major mistake. In 2010, the economy wasn't yet back on track-in fact, it had barely begun to recover."
When QE3 was launched, he said, "the economy was better, but still well short of healthy."
Williams said while Fed actions have been "extraordinary," they haven't been "radical" or "unprecedented," pointing out that in "normal times" the Fed buys and sells securities to maintain its federal funds rate target.
As for the Fed enabling Congress to delay action, Williams said, "Let me be clear that us doing our jobs doesn't absolve anyone of the responsibility to do theirs. Decisions about taxes, spending, and entitlement programs will always collectively be a political third rail, and monetary policy-be it accommodative or fully normalized-won't change that."
Further, he noted, if the Fed "propping up" the economy allows Congress avoid decision-making, "that implies that the only prompt to action would be an economy in freefall, something no one wants. Congress has many reasons to act on fiscal policy-not least of which being a growing population and shifting demographics that will see the largest generation in our history moving into old age-and nothing we do to interest rates will alter that reality."
Turning to the Fed's balance sheet and the risks it poses, Williams said, "I'm very cognizant of this issue, as is everyone at the Fed, and it's one we take seriously." He noted that "a lot of thought and effort" has gone "into ensuring that, once it's appropriate to normalize the stance of monetary policy, we can raise interest rates as needed, communicate our intentions to the markets, manage the balance sheet over time, and bring us back to full employment without undue inflationary pressures. So I understand the concerns, but we are aware of them, we're planning for them, and we've got the tools to manage them."
