Fed likely to keep on with QE3 until late 2013: Williams

SAN FRANCISCO Wed Nov 14, 2012 8:49pm EST

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SAN FRANCISCO Nov 14 (Reuters) - The U.S. Federal Reserve likely will keep buying both mortgage-backed securities and Treasuries until late 2013, a top Fed official said on Wednesday, suggesting the U.S. labor market will not see marked improvement until then.

"I expect it will be some time until the job market makes substantial progress toward our congressionally mandated maximum employment goal," San Francisco Fed President John Williams said at the University of San Francisco.

"I anticipate that we will need to continue our purchases of mortgage-backed securities and longer-term Treasury securities past the end of this year and likely well into the second half of next year in order to best achieve our mandated goals."

The central bank began an open-ended program of asset purchases in September, kicking it off with $40 billion in mortgage-backed securities purchases each month. The Fed is also buying 45 billion in long-term Treasuries each month, and selling a like amount of short-term Treasuries, under a separate program known as Operation Twist. Twist is due to expire in December, but the Fed will likely need to continue to purchase Treasuries in the new year as part of its current round of quantitative easing, Williams said.

The Fed's asset purchases are aimed at pushing down long-term interest rates when short-term rates are already near zero. QE3, as this third round of asset buys is known, has already begun to have the desired effects, Williams said, citing near-record-low mortgage rates.

But unemployment, at 7.9 percent, is still too high, and inflation is running below the Fed's 2 percent target. Added to that, Williams said, are threats to the recovery from Europe's snowballing crisis, China's slowdown, and the "fiscal cliff" of automatic spending cuts and tax increases that will go into effect in the United States at the start of 2013 if lawmakers do not avert it with a compromise.

"The steps the Fed has taken to boost the economy won't quickly return our economy to full strength," Williams said. "But they can help speed the recovery and make it more secure."

Some critics have warned the Fed's asset purchases could spark unwanted inflation, but Williams said such concerns are not warranted because the high jobless rate makes it difficult for businesses to raise prices or workers to demand pay raises.

Williams repeated his view that the unemployment rate will stay above 7 percent until at least the end of 2014, and inflation will stay below the Fed's 2 percent target for the next few years.

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