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By Ann Saphir
SUN VALLEY, Idaho, June 30 The Federal Reserve
will probably need to keep interest rates near zero for at least
another year, a top Fed official said on Monday, even as he
expressed optimism the economy is well on its way to health.
"As things get better we can kind of get back to our normal
approach to policy," San Francisco Fed President John Williams
told members of the Utah and Montana Bankers Association,
predicting full employment and normal inflation by the "early
part" of 2016.
The Fed has bought trillions of dollars of long-term
securities and kept interest rates near zero since December 2008
in an effort to boost employment and keep the economy from
becoming mired in a growth-sapping, downward price spiral.
Now, with economic growth picking up, unemployment falling,
and inflation showing signs of rising back to more healthy
levels, the Fed is winding down its massive bond-buying program
with plans to end it this fall.
As for rate rises, he said, "I still see that as some time
off in the future," telling reporters that he still believes a
rate rise will not be appropriate until the second half of 2015.
The Fed should "stop answering" questions about precisely
when it will raise rates, he said, because markets can swing
strongly if expectations suddenly shift.
That, he said, was the lesson of last year's so-called
"taper tantrum," when markets swooned after then Fed Chair Ben
Bernanke suggested the bond-buying program could end sooner than
many investors had been convinced it would.
Once rates rise, the Fed will eventually shrink its swollen
balance sheet to something "significantly smaller" than its
current level of more than $4 trillion, he said. He said he
would prefer the Fed's portfolio to eventually contain no
mortgage-backed securities, but said the Fed has years to decide
whether it will sell any assets to get there.
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
"early part" of 2016, he said.
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. It could rise above that
level under some scenarios, he said, expressing little
discomfort with such an outcome as long as the average level
over the medium term is near 2 percent.
"The bottom line is, it has worked," of the Fed's
extraordinarily stimulative policies since the Great Recession.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)