NEW YORK – Acknowledging that the Fed has “pushed short-term interest rates about as low as we can” and no ‘cure-alls for our economic ailments” exist, Federal Reserve Bank of San Francisco President and CEO John C. Williams said the Fed has the tools to tighten monetary policy, if needed, but he fears the economy won’t grow that quickly and could possible need more stimulus.
In addition to the low short-term interest rates, Williams told the Greater Phoenix Chamber of Commerce, “Our unconventional policies are aimed at creating additional economic stimulus by pushing down longer term rates as well.” While not solving the economic problems of the nation, Williams said, “they are helpful. Growth is faster and unemployment lower than they would be without these programs. And we have so far avoided an outbreak of deflation—that is, falling prices—that would have made an already bad situation even worse.”
Future monetary policy depends “on how the outlook for the economy and inflation develop,” he said. A “much more” rapid improvement in conditions “or if inflation shows signs of taking off,” would lead to tightening. “But, I fear the more likely situation is one of continued moderate growth, persistently high unemployment and undesirably low inflation. In that case, additional monetary policy accommodation—either in the form of additional asset purchases or further forward guidance on our future policy intentions—may be needed to bring us closer to our mandated objectives of maximum employment and price stability,” Williams said.
Williams said the recovery has been “slow” following “an especially severe financial crisis and recession,” with “painfully gradual progress on unemployment, and receding inflation,” a situation “that calls for continued action by the Federal Reserve to support a fragile economy.”
Recent economic data show signs of a slightly firmer recovery, with consumers and businesses both increasing their spending moderately. Yet, Williams said, he’s “afraid that this recent improvement doesn’t change the basic story.” With recovery “notably lackluster” and “likely to continue in that vein.”
With unemployment still high, millions of homeowners foreclosed upon and millions others underwater, “the recovery hardly seems real at all.”
“The fact is, even with recovery, tens of millions of people are facing real hardship in the form of lost jobs, stagnant incomes, and a harder struggle to make ends meet. One person told me recently that the fact the recession is over is immaterial because so many people are acting as if we were still in one.”
Consumer spending and housing continue to hold back recovery, with consumers too skittish to spend and finances making it difficult for homeowners to upgrade and buyers facing higher downpayments and more stringent credit requirements than before. While he expects it to be several years before housing returns to “more normal levels,” any improvement “in construction will add momentum to the recovery.”
Williams forecast real GDP will grow about 2.25% in 2012 and “around 3%” in 2013. “Unfortunately, such growth will not be enough to make significant progress on unemployment. I see the jobless rate dropping only a bit from its current level of 9% to around 8¾% by the end of 2012 and reaching 8% at the end of 2013,” he said.
Noting that this is not an “upbeat forecast,” Williams added, “I should point out that there are risks that could cause growth to be even less than this forecast.” Europe, especially, could be a negative factor on our economy.
