SUN VALLEY, Idaho, June 30 The U.S economy will likely have returned to full employment and a healthy level of inflation by the end of 2016, a top Federal Reserve official predicted on Monday, even as he reiterated his view that interest rates will need to stay near zero for some time.
"The bottom line is, it has worked," San Francisco Fed President John Williams said of the Fed's extraordinarily stimulative policies since the Great Recession, including its purchases of trillions of dollars of long-term securities and its near-zero interest-rate policy since December 2008.
Likening the Fed's super-easy monetary policy to a cast on the broken leg of the economy, Williams told members of the Utah and Montana Bankers Association that it would have been a mistake to end the stimulative policies before now.
Doing so would only have hurt the economy and forced the Fed to take even more aggressive action later on, he said.
"We're moving towards normalization, and as the economy continues to improve, we'll take off the cast; when it's able to move on its own, we'll take away the walking stick," Williams said. "We won't raise interest rates for some time, which is the real marker of tightening policy."
Williams has previously said he does not think a rate rise will be appropriate until the second half of 2015, although he did not repeat that view in his prepared remarks on Monday.
Williams forecast real GDP would bounce back from its shocking decline in the first quarter, to grow at a pace faster than three percent through the end of 2014, and then a bit above three percent in 2015 and 2016.
That will be fast enough, he said, to push the current unemployment rate of 6.3 percent to 6 percent by the end of this year and 5.5 percent by the end of next year. The economy will likely reach full employment, which Williams sees as a jobless rate of about 5.25 percent, by the end of 2016.
Inflation, which has been stuck below the Fed's 2-percent target for years, will rise gradually back to that level as the economy nears full employment, he said.
Williams, who does not have a vote on the Fed's policy-setting panel this year, said that when the Fed does begin to raise rates, it will need to pay careful attention to what it says.
"Making that communication work won't necessarily be easy, as the taper tantrum reminded us last year," he said, referring to the sudden rise in market rates after then Fed Chair Ben Bernanke suggested the Fed could pare its bond-buying stimulus sooner than markets had expected.
"But we've put a lot of thought and effort into ensuring that, once it's appropriate to normalize the stance of monetary policy, we can raise interest rates as needed, communicate our intentions to the markets, manage the balance sheet over time, and bring us back to full employment without undue inflationary pressures," he said. (Reporting by Ann Saphir; Editing by Chizu Nomiyama)