Fed should eventually leave crisis-era tools behind: Williams

BOSTON Fri Oct 18, 2013 4:31pm EDT

BOSTON (Reuters) - A top Federal Reserve official said on Friday he expects the U.S. central bank to return to using only bread-and-butter policy tools once it finally raises interest rates, leaving behind the extraordinary measures that it has come to rely on in the aftermath of the Great Recession.

John Williams, president of the San Francisco Fed, predicted there will be no need for large-scale asset purchases, nor for tying interest-rate changes to specific economic "thresholds" when things return to normal.

Both policy tools have been used by the Fed for the first time in the last few years to battle the 2007-2009 financial crisis and to help along the very slow U.S. economic recovery from the brutal recession that resulted.

Williams, in remarks prepared for delivery to a National Bureau of Economic Research conference, said he does not see bond-buying, known as quantitative easing, as part of the Fed's toolkit once rates rise from near zero, where they have been since late 2008.

"We're still much less certain about their effects than we are about the effects of changes in the federal funds rate," he said.

The Fed has been buying U.S. Treasuries and mortgage-backed securities at a monthly pace of $85 billion.

The Fed has said it will keep rates near zero until unemployment falls to at least 6.5 percent, as long as inflation expectations remain below 2.5 percent.

"I expect that the explicit link between future policy actions and specific numerical thresholds, as in the recent (Fed) statements, will not be a regular aspect of forward guidance, at least when the federal funds rate is not constrained by the zero lower bound," Williams said.

"In normal times, a more nuanced approach to policy communication will likely be warranted."

(Reporting by Richard Valdmanis; Writing by Jonathan Spicer; Editing by Leslie Adler)

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