Fed’s low-rate pledge tricky, says William
Says US central bank should extend bond purchases into 2013
SALT LAKE CITY
Federal Reserve Bank of San Francisco President John Williams said the central bank should extend its program of bond purchases into next year by buying both mortgage-backed securities and Treasuries.
“We should continue the MBS purchases into next year and continue the Treasury purchases,” Williams said to reporters today after a speech in Salt Lake City. “I haven’t seen the kind of improvement in labor-market conditions that would call for ending the MBS purchases.”
San Francisco Federal
Reserve President John Williams on Sunday expressed scepticism over tying the Federal Reserve’s low-rate vow to economic conditions, signalling that the internal debate at the central bank over changes to its communication policy is far from over.
The Federal Reserve’s current approach is to link policy to a date in the future, telling markets since September that it expects to maintain ultra-low rates until at least mid- 2015. That approach has worked well, Williams said. “The calendar date has been pretty effective at aligning expectations with our own views,” Williams told reporters after a speech here. “There is a little bit in my mind of, if it ain’t broke, don’t fix it.
Federal Reserve policymakers have been weighing whether it would be more effective to promise low rates until certain economic conditions are met, and minutes of the Fed’s September meeting showed broad support for such a switch.
Chicago Fed President Charles Evans has been the biggest proponent of the idea, saying the Fed should vow low rates until unemployment falls below 7 per cent, as long as inflation does not threaten to rise above 3 per cent. Minneapolis Fed President Narayana Kocherlakota came out in September with a variation on Evans approach, saying the Fed should keep rates low until unemployment reaches 5.5 per cent, as long as inflation does not top 2.25 per cent. President Evans did a great service in getting this idea out there and getting us to think about it, and President Kocherlakota, Williams said. “I completely agree that it would be better to explain our forward policy guidance in terms of economic variables, but it’s just harder to get this right and feel confident that this is going to achieve our communication goals than maybe it seems to some people. Chief among his worries, Williams said, is that markets will see numerical thresholds as policy triggers. If we said we are going to keep interest rates low until unemployment falls below some number, like 7 per cent, or whatever the number is, I have a concern that market participants would say, “OK, we are going to watch the unemployment rate everymonth and when it falls to 6.9 per cent they are going to raise rates,” Williams said.
But the Fed may decide not to raise rates if, for instance, inflation falls too low, he said. The issue of, what are we really communicating when we put those thresholds out? is tricky.
As recently as last month, Williams was more supportive of the idea, even offering his own formula for linking policy and economics in an interview. At the time, he said he would support keeping rates low until unemployment fell somewhat below 7 per cent, as long as inflation does not threaten to rise above 2.5 per cent.
Boston Fed President Eric Rosengren drew his line in the sand, saying the Fed should keep buying assets until the jobless rate falls below 7.25 per cent, as long as inflation remains subdued. Williams said on Friday he is unsure that a change is advisable.