SAN FRANCISCO May 22 The Federal Reserve is
finally moving back to "normal" monetary policy, a top Fed
official said on Thursday, even as he warned of possible lurches
along the way.
Painting a largely upbeat picture of the economic outlook,
San Francisco Fed President John Williams forecast 3 percent
growth this year and next, a return to a normal U.S. job market
by 2016, and a rise in inflation toward the Fed's 2 percent
target over roughly the same period.
Improvement in the economy over the last year or so has
allowed the Fed to begin to cut back on its massive bond-buying
program, with a view to ending it in October or December, he
told reporters, saying he had no personal preference on the
Still, "A real tightening of policy, which would mean
raising the fed funds rate, is still a good way off," Williams
said. The fed funds rate, at which banks lend to each other
overnight, has been held near zero since December 2008, and the
Fed has said it will stay that way for a "considerable time"
after bond-buying ends.
"As we get closer to be in a position where we think it's
time to raise interest rates, there will be hints of that and
discussion of that in people's speeches, and you will definitely
see that, I think, presumably, in the economic projections of
(Fed policy-setting committee) participants," Williams told
reporters. "As you get closer, hopefully we'll be better able to
communicate what our thinking is about the appropriate time and
pace of liftoff."
But Williams warned that the Fed's super-easy monetary
policy over the past five years has left financial markets
vulnerable, making the road to normalcy a tricky one to
"We have to be kind of careful and gradual about how we
communicate and how we move our policies, recognizing that even
though it seems like this should go smoothly, it may not," he
"There's stuff going on that could lurch when we do our
normalization of policy. Williams noted that the Fed has in the
past overestimated its grasp of market psychology, most notably
when the Fed Chairman Ben Bernanke last year hinted that the Fed
could soon trim its bond-buying program.
Shorthanding his own interpretation of the unexpected market
swoon that ensued, Williams on Thursday said it seemed to him
that "Ben Bernanke went out there and said something that
(markets) already knew, and they freaked out."
As for the running debate over whether short-term
unemployment, which is near historical norms, better signals the
health of the labor market than long-term unemployment, which is
high, Williams said it is "an intellectually fascinating" issue.
But no matter which side is right, wages, which have been
flat, should begin to rise as the labor market tightens, he
"The policy implications (of the debate) don't seem to be
that big to me," he said.
(Reporting by Ann Saphir; Editing by Meredith Mazzilli and