Fed's Williams: QE3 provides needed 'oomph' to U.S. economy
SAN FRANCISCO, Sept 24 |
SAN FRANCISCO, Sept 24 (Reuters) - The Federal Reserve's latest round of monetary stimulus will help get the U.S. economy back on track and speed the return to full employment, a top official of the U.S. central bank said on Monday.
The Fed's actions should push down borrowing costs, making the purchase of new cars cheaper, for example, which in turn will boost sales and prompt factories to hire new workers, John Williams, president of the San Francisco Federal Reserve Bank, said.
"This is exactly the kind of virtuous circle that provides the oomph in a healthy economic recovery," Williams said in remarks prepared for delivery to the City Club of San Francisco.
"Monetary policy cannot solve all problems that affect our economy. But it can help speed the pace of recovery and get our country back on track sooner," he said.
The U.S. central bank earlier this month said it would buy $40 billion a month in mortgage-backed securities and keep on buying until the labor market improves substantially. It also said it would keep interest rates low through at least mid-2015.
Williams gave a full-throated endorsement of the Fed's latest round of bond purchases while also acknowledging recent improvements in the economy, marked by a rise in auto sales and "signs of life" in the housing sector. Housing construction in particular will be a key source of growth for the economy over the next few years, he said.
But though the economy is "on the mend," he said, without new Fed stimulus any improvement in the employment picture would likely be modest and inflation could get stuck below the Fed's 2 percent goal.
The outlook is further threatened by the possibility of spillover from Europe's as yet unresolved sovereign debt crisis, the looming "fiscal cliff" of automatic tax increases and spending cuts that are to go into effect at year-end unless Congress acts, and uncertainty over the economic outlook.
The U.S. jobless rate registered 8.1 percent in August, well above the 6 percent level that Williams sees as sustainable over the long-term. Inflation has averaged 1.3 percent over the last year.
In light of the Fed's latest action, Williams said he now expects growth in gross domestic product to accelerate, from 1.75 percent this year, to 2.25 percent next year, to an above-trend 3.25 percent in 2014.
The jobless rate, he predicted, will likely fall to 7.25 percent by the end of 2014. Inflation he said will likely increase to a level closer to the Fed's 2 percent target.
With an open-ended bond-purchase program, he explained, the Fed can ramp up purchases and even expand into purchases of other assets if progress on jobs is too slow. It can also slow down or stop purchases if progress is faster than expected.
Those arriving for Williams' speech on Monday, on the 10th floor of a building that used to house the Pacific Stock Exchange, walked up a stairway painted with a mural by Mexican artist Diego Rivera, known for his passionate support for workers and their struggles.
While the Fed tied its latest policy move specifically to the state of the labor market, Williams emphasized that the Fed was no less concerned about inflation.
Some observers have worried the Fed's latest move could unmoor the country from the anchor of low inflation expectations.
"I want to stress, in no way has our commitment to price stability wavered," Williams said. "Inflation is something we watch carefully, and we remain determined to work toward our price stability objective."
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