| March 5
March 5 Rebounding auto sales and improving home
sales and construction are good evidence that the Federal
Reserve's super-easy monetary policy is boosting the U.S.
economy, a top Fed official told a group of students on
"The rebounding sectors are the interest-sensitive ones,"
San Francisco Federal Reserve Bank President John Williams said
in a speech to students at the University of Seattle that
otherwise contained little about the outlook for the economy or
Buyers borrow money to finance purchases of cars and houses,
the reasoning goes, so lowering borrowing costs will affect
those industries first and most.
The fact that auto sales are nearly back to their pre-crisis
levels, and housing sales have much improved, are evidence that
the Fed's efforts to push down borrowing costs are working,
Williams said. The Fed has kept short-term rates near zero for
more than five years and bought trillions of dollars of
Treasuries and mortgage-backed securities to encourage people
and businesses to spend and invest.
Williams, who was a key economic advisor to Janet Yellen
when she ran the San Francisco Fed, has been a vocal supporter
of the Fed's super-easy monetary policies. But he has also been
ahead of many of his colleagues at the Fed in calling for the
central bank to wind down its massive bond-buying program.
The Fed began that process this past December, and plans to
end its bond-buying, now at $65 billion a month, before the end
of this year. Williams has said he expects the Fed to begin to
raise rates by the middle of next year.
Most of Williams' prepared remarks on Wednesday were meant
to educate students about the basics of Fed policy. In one
surprise, Williams, who has a doctorate in economics from
Stanford University, suggested that the market reaction to the
Fed's unexpected policy announcement in September was only what
economists would have predicted.
In June, bond yields rose and stock prices tanked after then
Fed Chair Ben Bernanke expressed optimism about the economic
recovery and said the Fed would likely begin reducing its
bond-buying program later in the year. The rout later became
known as the "taper tantrum" to mark the fierce and, to the Fed,
unwelcome drop in stocks and rise in borrowing costs.
"Investors had clearly been expecting tapering to occur much
later," Williams said.
In September, when investors were resigned to the idea that
the Fed would start those reductions soon, bond yields fell and
stock prices surged when the Fed unexpectedly kept its
bond-buying program intact.
"Because they expected us to begin the taper, market
participants saw not changing anything as essentially an easing
of monetary policy," Williams said. "This is a great example of
economic theory playing out in practice exactly as it's supposed
Notably, Williams did not say that neither he nor his Fed
colleagues, many of whom are also economists, had not
anticipated that the market would react the way it did to
Bernanke's comments in June.