NEW YORK – It makes sense to target “problem areas” of the economy rather than take across-the-board actions, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Friday.
“For example, purchases of mortgage-related securities appear to have reduced mortgage rates significantly, making them particularly useful given the weakness in the housing sector,” Williams told the Monetary Policy Forum, according to prepared text of his remarks, released by the Fed. By directly addressing “housing-related headwinds,” you create “a stronger housing recovery and more powerful effects from the existing monetary stimulus,” he said.
Discussing a paper presented at the conference, “Housing, Monetary Policy, and the Recovery,” William said he agrees with its executive summary, which calls for “a more aggressive monetary response than in normal downturns.”
While the federal funds rate target has effectively been zero, conditions called for a “substantially negative” target in recent years.
With credit market stresses, refinancings “and other housing activity” are “less responsive” to interest rates changes. “Fortunately, the monetary transmission mechanism doesn’t work solely through its effects on housing, or even through balance sheets and collateral constraints more generally,” he said. “Monetary policy also affects the economy through wealth effects, household intertemporal substitution, the user cost of capital generally, and exchange rates, among other mechanisms.”
However, if the belief that “monetary policy is less powerful than usual” is true, he said, it “suggests we need to move our monetary instruments even more than usual to achieve our employment and price-stability objectives.”
The problem is that if the Fed addresses “a big output gap in one region, we could be overheating other regions.” He dismissed that concern as “largely hypothetical.”
“It’s not the case that some areas are overheating and others are languishing,” Williams said. “Every region is facing substantial common headwinds.”