Fed's Williams "increasingly hopeful" on recovery

DANA POINT, California Fri May 4, 2012 1:48pm EDT

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled ''U.S. Overview: Is the Recovery Sustainable'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled ''U.S. Overview: Is the Recovery Sustainable'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012.

Credit: Reuters/Danny Moloshok

DANA POINT, California (Reuters) - A top Federal Reserve official painted an improving picture of the U.S. economy on Friday but said lofty unemployment, a festering crisis in Europe, and the year-end expiration of stimulative tax cuts make continued easy monetary policy a must.

"Substantial risks remain that could cause the economy to perform worse than I expect," San Francisco Federal Reserve Bank President John Williams said at an annual California bankers' meeting at a Ritz-Carlton coastal resort about an hour's drive from Los Angeles. "Under these circumstances, it's crucial that we continue our highly accommodative monetary policy."

After his speech, he told reporters he's still a member of the "2014 camp," a reference to the Fed's projection that it will need to keep interest rates low through late 2014 to help the recovery.

His remarks came just hours after a U.S. government report showed employers cut back on hiring in April, and that the jobless rate fell to 8.1 percent.

Williams said the data does not change his projection that people will crowd back into the workforce as growth spurs jobs. But, he said, data over the next "many months" could force him to reconsider that view, in turn changing his views on policy.

While "increasingly hopeful that the recovery has entered a phase of self-sustaining growth," Williams expects only a small improvement in the labor market this year, forecasting the unemployment rate at around 8 percent by year's end and "a little below that" next year.

Often labeled a dove because of his strong support for employment-boosting monetary policy measures, Williams has used his vote on the Fed's policy-setting committee this year to support continued monetary easing.

Still, he took issue with that label.

"I would think of myself as much more a centrist among the committee," Williams told reporters.

If growth is faster than he predicts, or inflation rises above the Fed's 2-percent target, the Fed may need to raise rates earlier than in late 2014, he said.

He also shot down the idea, embraced by Nobel-Prize-winning economist Paul Krugman, that boosting inflation purposefully would help the economy by prodding people into spending more, sooner.

The positive effects of such an effort "would be modest" and "the potential costs would be quite significant," particularly in terms of the potential for the Fed to lose its credibility as an inflation fighter, Williams said.

Williams on Friday projected U.S. growth at 2.5 percent this year and 2.75 percent in 2013, with inflation at around the Fed's 2-percent target this year and somewhat below that in 2013 and 2014.

Even those projections, at the low end of Fed officials' April forecasts, could be over optimistic, he said, given Europe's failure to definitively resolve its financial problems, and the scheduled year-end expiration of tax cuts and a payroll tax holiday in the United States.

In a nod to his banker audience, Williams said continued low interest rates create a "tough" environment for banks.

But "our mandate from Congress is to focus on the economic goals of maximum employment and price stability," he said. "Clearly, a solid economic recovery is in the best interest of the banking system as well."

(Reporting by Ann Saphir. Editing by Padraic Cassidy and Bernadette Baum)

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