Williams says Fed must use all tools, joblessness a "calamity"

VANCOUVER, Washington Tue Jan 10, 2012 1:56pm EST

VANCOUVER, Washington (Reuters) - The Federal Reserve will do all it can to support a "notably weak" U.S. economic recovery and bring down unemployment from its "shockingly" high level, a top Fed official said on Tuesday.

If inflation falls as expected, San Francisco Fed President John Williams told reporters after a speech in Vancouver, Wash., there is a "strong argument for going to, I think, purchasing more mortgage backed securities down the road."

Williams also warned of the potential threat from Europe's ongoing debt crisis, which he said leaders are working to address. "But, if they fail, all bets are off."

Williams said he is hopeful policymakers will resolve the problems in Europe, where several countries are struggling to pay their debts, putting a strain on European banks that hold government bonds and raising the specter of a dissolution of the region's shared currency. But even without a shock from Europe, Williams said, the United States is in for a period of slow growth that could use help from the central bank.

Williams painted a picture of continuing economic weakness, forecasting economic growth this year at 2.5 percent and 3 percent next year, a pace he said is too slow to take a big bite out of unemployment. The jobless rate, which registered 8.5 percent in December, will stay above 8 percent well into next year, ending 2014 at around 7 percent, he predicted, calling the situation a "national calamity."

Even without buying bonds, the Fed may be able to influence borrowing costs through the short-term interest rate forecasts that it will begin publishing after its next meeting January 24-25, he said. And even if the rate forecasts do not directly budge long-term rates, he said, they will remove uncertainty that's currently hampering businesses and keeping consumers from spending.

"It's vital that the Fed use all the tools at its disposal to achieve its mandated employment and price stability goals," said Williams, who this month will cast his first vote on the Fed's policy-setting panel since becoming head of the Fed's westernmost outpost last year.

The Fed is increasingly focused on housing, and several Fed officials have recently come out in favor of buying more mortgage-backed securities, arguing that a depressed housing market is keeping the recovery weak by crimping consumer spending and keeping credit tight.

Last week the Fed called for U.S. government-run mortgage finance firms Fannie Mae and Freddie Mac to play a bigger role in turning around the battered U.S. housing market, a move Williams on Tuesday said could make a difference.

The U.S. central bank has kept interest rates at near zero for more than three years and has signaled it will keep them there through at least mid-2013. It has also bought $2.3 trillion in long-term securities to shore up the economy, actions that Williams said averted a depression.

Inflation, he predicted, will fall below 1.5 percent this year and next, short of the Fed's informal goal of 2 percent or a bit below. Taken together, his forecasts are a recipe for more Fed action.

"The data so far on the inflation front are confirming my view that inflation is ebbing and moving to be too low, and that is an important driver of my thinking about policy," he told reporters.

Williams also threw his weight behind adopting an explicit inflation target, an idea that has been gaining ground at the Fed. Some Fed officials have historically resisted, saying it could emphasize the central bank's inflation-fighting mandate to the detriment of its twin goal of achieving maximum employment.

Williams said the Fed could make its inflation goal explicit without doing the same on the jobs side, pointing out the Fed already gives guidance on its long-run expectations for unemployment through its quarterly forecasts.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama, Diane Craft)

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