Fed’s low-rate pledge tricky, says Wil­liam

Says US cen­tral bank should ex­tend bond pur­chases into 2013

The Pak Banker - - Front Page -


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.

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