WASHINGTON - Recent news on the U.S. economy has been positive, even in the jobs market, and there is a renewed sense of optimism, but the economy clearly still needs "extraordinarily supportive" monetary policy, San Francisco Federal Reserve Bank President John Williams said late Thursday night.

Williams stressed that the Fed's policy guidance on keeping rates near zero through 2014 is not a commitment, and the central bank begin to remove stimulus when the time comes and the situation changes.

"The economy is growing, and the recent economic news has been increasingly positive," Williams said in a speech prepared for delivery to the CFA Hawaii Seventh Annual Economic Forecast Dinner in Honolulu. "This is very welcome progress, but it's brought us only part of the way back. Unemployment remains a huge problem, and that means real hardship for millions of Americans."

Williams said the "aggressive Fed response is an important reason why the economy has moved to more solid ground," but "the Fed's job is not over yet. Far from it." And there is "lots of work to do" before the Fed can say it has met the goal of full employment.

Household finances, housing, and credit-are have been trouble areas and are "likely to hold down spending growth for some time," he said, but added "overall, things are getting better. You can sense greater optimism out there-albeit cautious optimism."

Even with the good news, however, Williams repeated his position that the strong monetary policy response that prevented another depression still is needed to buoy the recovery, especially as the low growth forecast will not be enough to bring down unemployment, which he expects to remain above 8% through next year and 7% for several more.

"This is clearly a situation in which we have to keep applying monetary policy stimulus vigorously," he said.

In contrast to those Fed officials who argue that the excessive stimulus risks fueling inflation, Williams said inflation remains subdued and in fact more stimulus may be needed.

But he also stressed that the policy statement indicating the federal funds rate is expected to remain exceptionally low at least through 2014, is not a promise and policy will change if the situation warrants.

Williams said "our statements are not an absolute commitment to keep rates near zero. It's simply the FOMC's current judgment about the best future course of policy. If the economic outlook changes, then the guidance could change too.

"Let me emphasize that the unusually stimulatory monetary policy now in place won't last forever. Eventually we will cut back the size of our securities holdings and raise our unusually low interest rate target," he said.

"The key point is that the economy currently needs an extraordinarily supportive policy. But we'll reverse course when the time comes to remove this support."

He also repeated his caution that "we may need to do more if the recovery falters or if inflation stays well below 2%. If the economy does need more stimulus, restarting our program of purchasing mortgage-backed securities would probably be the best course of action.

"The policy actions the Fed takes will depend on how economic conditions develop. If circumstances change, our policies will adapt."

Williams welcomed the recent good news on the European debt crisis, which he called the biggest threat to the U.S. outlook, including the short-term fix to the situation in Greece.

"Hopefully, that will prevent the situation from spinning out of control and igniting a wider financial crisis in Europe," he said, since "in today's interconnected world, financial turmoil in Europe would definitely hurt our economy as well."

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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