Fed's Williams: Bernanke's taper timetable 'best course forward'
PORTLAND, Ore. Sept 4
PORTLAND, Ore. Sept 4 (Reuters) - The Federal Reserve should begin to trim its massive bond-buying stimulus later this year and end it mid-2014, as long as the job market continues to heal and inflation heads back up toward 2 percent, a top Fed official said on Wednesday.
That timetable for weaning markets of the Fed's monthly $85 billion asset purchases, laid out by Fed Chairman Ben Bernanke in June, is still "the best course forward," San Francisco Fed President John Williams said in remarks prepared for delivery to a group of business and community leaders in Portland, Oregon.
The Fed has been buying Treasuries and mortgage-backed securities since last September to push down long-term borrowing costs, and has promised to continue the program until there is substantial improvement in the labor market outlook.
Fed policy-makers next meet later this month, and many economists expect the central bank to begin reducing bond purchases then.
Williams did not use his prepared remarks to signal whether he would support a cutback so soon, but he did acknowledge the time is approaching.
"Clearly, we are getting closer to meeting our test of substantial improvement in the labor market," said Williams, a centrist policymaker whose views often reflect those of the Fed's decision-making core.
Williams was at pains to emphasize that a reduction in the Fed's bond-buying program, known as QE3 because it is the U.S. central bank's third round of quantitative easing, is not the same as tightening monetary policy. As long as the Fed continues to buy bonds, he said, the Fed is adding monetary stimulus.
And even after the Fed stops buying bonds, likely by mid-2014 when he expects the unemployment rate to fall to about 7 percent, short-term interest rates will remain low.
Williams said he does not expect unemployment to fall to 6.5 percent, the level at which the Fed has said it will first consider raising rates, until the first half of 2015, "and I don't expect the (Fed) to raise rates until later that year," he said.
The unemployment rate fell to 7.4 percent in July, down from a peak of 10 percent. That figure somewhat overstates the health of the labor market because the lack of job availability has driven some workers to give up searching for jobs altogether, Williams said.
But other labor market indicators also suggest the jobs market is improving, he said.
Recent data also suggests that recent declines in inflation to well below the Fed's 2 percent target are probably temporary, Williams said. He said he expects inflation to move back up to 2 percent gradually over the next few years, as unemployment gradually declines.
U.S. gross domestic product, he forecast, will probably grow about 2 percent this year and about 3 percent next year as the drag from tight fiscal policy abates.