* Inflation is low, not seeing signs of rising inflation:
* Fed has tools to combat unwanted inflation if it
materializes, Williams says
* Williams sees QE3 surpassing QE2's $600 billion of asset
By Ann Saphir
IRVINE, Calif., Nov 5 The U.S. Federal Reserve's
unconventional monetary policies have lowered borrowing costs
and boosted growth without creating unwanted inflation, a top
Fed official said on Monday, predicting the Fed's latest round
of asset-buying will exceed $600 billion.
The Fed will want to see sustained jobs gains and a
consistent drop in the unemployment rate before it stops buying
assets, making it likely the purchases will continue until "well
into next year," John Williams, president of the San Francisco
Federal Reserve Bank, told reporters after a lecture at the
University of California, Irvine.
The U.S. central bank's prior round of quantitative easing
totaled $600 billion; its first one was about $1.7 trillion.
The Fed began its third round of quantitative easing, known
as QE3, in September, beginning with $40 billion a month in
mortgage-backed securities and promising to continue or expand
the purchases if the labor market does not improve
Although asset-buying and other non-traditional monetary
policies pose potential risks, "the available evidence suggests
they have been effective in stimulating growth without creating
an undesirable rise in inflation," Williams said at the lecture.
"We are not seeing signs of rising inflation on the horizon."
The policies also have not stimulated excessive risk-taking,
The Fed lowered short-term interest rates to zero in
December 2008, and has bought more than $2 trillion in long-term
securities to lower borrowing costs even more.
August 2011 it moved further into unconventional territory
by saying it planned to keep rates ultra-low for about two more
years, a form of policy easing known as forward guidance.
In September, the Fed launched a third round of asset
purchases and promised to keep rates low until at least
The latest asset purchase program kicked off with an initial
$40 billion a month in mortgage-backed securities, and the Fed
said it will continue or expand the program until the jobs
situation improves substantially.
Unemployment was 7.9 percent last month, considerably higher
than the 5 percent to 6 percent that most economists see as the
norm for the U.S. economy. Inflation has averaged below the
Fed's 2 percent target over the past year.
Williams told the largely student audience that the Fed's
first two rounds of asset-buying likely shaved 1.5 percentage
points from the unemployment rate. They also probably kept the
U.S. economy from falling into deflation, he said.
Forward guidance has also become a key monetary policy tool,
he said. The Fed's first stab at it, in August 2011 when it
promised low rates until mid-2013, pushed down borrowing costs
sharply, equivalent to cutting short-term interest rates by 3/4
to 1 percentage point, he said.
Such guidance only works if the public believes the central
bank will do what it says, he added.
"If the public doesn't understand the central bank's
intended policy path, then forward guidance may not work so
well," he said.
One way for the central bank to reinforce public
expectations is to buy assets on a large scale, effectively
"putting its money where its mouth is," he said. Buying assets
shows the Fed is "determined to ease monetary conditions," he
said - and helps push down rates further.
Quantifying the effects of the Fed's policies is difficult,
he added, but "the presence of uncertainty does not mean that we
shouldn't be using these tools."
Williams has been a strong supporter of the U.S. central
bank's super-easy monetary policy and is a voter this year on
the Fed's policy-setting committee.
Once it comes time to exit its super-easy monetary policy,
the Fed will target a "soft landing," raising rates and then
selling the assets it has accumulated in its bid to push
borrowing costs lower, Williams said.