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 Wednesday.
"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 monetary policy.
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 to."
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.