Fed's Williams: forward guidance is best tool for Fed policy

PORTLAND, Oregon Wed Sep 4, 2013 1:47pm EDT

PORTLAND, Oregon (Reuters) - The Federal Reserve would do better to use guidance on the likely path of future interest rates rather than further bond purchases should the economy take a turn for the worse, a top Fed official said on Wednesday.

"If economy were to slow and inflation were to drift below what we would like," the Fed's "first" tool to ease policy further should be interest-rate guidance, San Francisco Fed President John Williams told community and business leaders here.

The Fed's asset purchases have reduced long-term borrowing costs, he said, probably cutting the term premium on the 10-year U.S. Treasury note by about one percentage point. That said, there are more uncertainties around the effectiveness of asset purchases than around interest-rate guidance, he said.

Downside risks to the economy include a further weakening of Europe's economy, he said.

(Reporting by Ann Saphir; Editing by Andrea Ricci)

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