May 3, 2012 / 5:01 PM / 5 years ago

Fed's Williams-need 'strong' stimulus for 'quite some time'

3 Min Read

SANTA BARBARA, Calif., May 3 (Reuters) - With the U.S. jobless rate "far too high," the Federal Reserve will need to keep its foot on the monetary gas pedal for quite some time, San Francisco Fed President John Williams said on Thursday.

The U.S. central bank has kept inflation "well under control" and near its 2 percent target, but the unemployment rate, at 8.2 percent, is still about 2 percentage points higher than the point where inflation pressures could be expected to kick in, Williams told the Santa Barbara County Economic Summit.

Taken together, he said, those conditions mean "It's essential that we keep strong monetary stimulus in place for quite some time."

Williams, who is a voting member this year on the Fed's policy-setting panel, did not suggest the Fed would need to add to its stimulus.

The Fed has kept interest rates near zero since December 2008, and has bought $2.3 trillion in long-term securities to push down borrowing costs still further and rekindle growth after the Great Recession.

Economic growth, though, will likely stay "moderate" for the next few years, Williams said, and the unemployment rate will fall to about 7 percent by the end of 2014.

That's the date until which the Fed has said it will likely need to keep rates low, given the state of the economy.

The effects of the housing collapse, tight credit, a drop in government spending and overall uncertainty over the economic and political outlook and the situation in Europe continue to hold the economy back, he said.

Williams took aim at the notion, embraced by some of his fellow Fed policymakers, that structural factors including mismatch between the skills employers seek and those that workers have are central to the high unemployment rate.

Empirical studies, Williams said, show that's not the case, with structural factors contributing only "a bit" to the current jobless rate. The natural rate of unemployment -- the point at which undesirable inflation pressures start to build -- has likely risen to about 6 percent to 6.5 percent in the recent recession, he said.

Over the longer term, even those structural factors will recede, leaving the natural unemployment rate at about 5.5 percent.

"The elevated rate of unemployment is primarily due to a shortage of demand," he said.

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