NEW YORK – If the economic recovery stalls, more policy accommodation would be in order, most likely the Fed’s buying of mortgage-backed securities, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Wednesday.
“Looking ahead, we may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2%. Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy,” Williams told the Bishop Ranch Forum, according to prepared text of his remarks, released by the Fed.
Updating remarks he made last month at a breakfast in Vancouver, Wash., Williams addressed the recent FOMC communications and predictions. The FOMC at its last meeting extended the length of time it expects the federal funds rate to remain exceptionally low to “at least through late 2014,” an extension from the previous guidance of mid-2013.
Telling investors short-term interest rates should stay low “for a long time,” helps lower longer-term interest rates.
“It’s important to emphasize that this is not a promise or commitment to keep rates near zero,” he said. “Instead, it’s our best collective judgment about the likely future course of policy. And, of course, it will change if the economic outlook changes.”
The Fed’s working on bettering its communication of monetary policy strategy and plans, he said, by stating “our longer-run goals and strategies — essentially, a statement of our monetary policy principles,” which defines a 2% “inflation rate as most consistent with our mandates.”
The Fed “also emphasized that we will continue to carefully balance our dual goals of maximum employment and price stability in making our policy decisions,” Williams noted.
Regarding the projection “of short-term interest rates over the next few years ... should reduce public uncertainty about our plans for monetary policy. And that, in turn, improves the effectiveness of our policies.”
While the Fed does everything it can to assist economic growth, “We recognize that monetary policy cannot perform magic. Lower interest rates alone can’t fix all the economy’s problems. But they do help. Conditions are far better today than they would be if the Fed hadn’t administered such strong medicine.”
Future fed policy actions “will depend on how economic conditions develop, and they will change as economic circumstances change,” Williams said.
Williams reiterated the weak economic recovery will continue, with “frustratingly slow” growth. “The good news is that the U.S. economy has been growing for the past two-and-a-half years. The unemployment rate has fallen about three-quarters of a percentage point in the past four months, and is now at its lowest level in nearly three years,” he said. “Nonetheless, we are still suffering from the aftereffects of the worst recession of the post-World War II period. Compared to the pattern seen in past recessions, the economic recovery has been weak. And, despite relatively strong job gains in recent months, the unemployment rate remains very high. … I expect the pace of economic growth to be frustratingly slow and the unemployment rate to remain high for years to come.”