Fed's Williams: keep buying bonds well into 2nd half of 2013

NEW YORK Thu Feb 21, 2013 12:59pm EST

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NEW YORK Feb 21 (Reuters) - The U.S. Federal Reserve should keep buying bonds until well into the second half of this year to spur hiring at a time when inflation pressures remain in check, a senior U.S. central banker said on Thursday.

"The Fed's dual mandate from Congress is to pursue maximum employment and price stability. We are missing on both of these goals... Unemployment is far too high and inflation is too low," said San Francisco Federal Reserve President John Williams.

As a result, Williams, who is not a voting member of the Fed's policy-setting committee this year, said the U.S. economy needs "powerful and continuing" policy stimulus.

"I anticipate that purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of this year," he said in remarks prepared for delivery to The Forecasters Club in New York.

The Fed opted in January to keep buying bonds at an $85 billion monthly pace until the labor market outlook improved substantially. But the minutes of that meeting, released on Wednesday, highlighted divisions on the 19-strong policy-setting committee with some officials concerned about its rising costs.

It also committed to hold interest rates near zero to support the recovery until unemployment fell to 6.5 percent, so long as inflation did not threaten to rise above 2.5 percent. The U.S. jobless rate in January was 7.9 percent.

Williams did not dwell on the risks associated with the purchases that have tripled the size of the Fed's balance sheet to around $3 trillion since 2008. But he did play down the concern this massive expansion would fan future inflation.

"I want to assure you that in no way have we relaxed our commitment to our price stability mandate. We constantly monitor inflation trends and inflation expectations. And we will not hesitate to act if necessary," he said.

The Fed's long-term inflation goal is 2 percent and Williams projected inflation, measured by the Fed's preferred personal consumption expenditures price index (PCE), would average around 1-1/2 percent over the next few years.

However, he was not entirely gloomy on growth and emphasized that a gradual U.S. recovery appeared to be on track, forecasting economic growth to mount 2-3/4 percent this year and 3-1/4 percent in 2014. But this will not quickly curb unemployment.

"I expect the (jobless) rate to stay at or above 7 percent at least through the end of 2014 and not drop below 6-1/2 percent until the second half of 2015," Williams said.

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