| PHOENIX, Ariz.
PHOENIX, Ariz. Jan 7 The Federal Reserve will
likely phase out its massive bond-buying stimulus this year if
the U.S. economic recovery strengthens as expected, a top Fed
official said on Tuesday, but it is still far from any thought
of hiking interest rates.
With unemployment, at 7 percent, well above healthy levels
and inflation undesirably low, the economy needs continued
stimulus from the central bank, San Francisco Federal Reserve
Bank President John Williams said in remarks prepared for
delivery to the Arizona Bankers Association.
"I want to stress that scaling back on asset purchases is
not a retreat from accommodative monetary policy," Williams
said. "We're starting to ease off the gas, but we're nowhere
near hitting the brakes yet."
The Fed has kept short-term interest rates near zero for
more than five years and has swollen its balance sheet to an
unprecedented $4 trillion through a series of bond-buying
programs. The Fed's asset purchases, known as quantitative
easing, are aimed at lower borrowing costs to spur investment
and hiring after the worst downturn in decades.
Last month, amid unmistakable signs of a quickening
recovery, the Fed took a first step towards dialing down that
stimulus by trimming its $85 billion-a-month bond-buying program
to $75 billion.
Fed Chairman Ben Bernanke, who is serving his final month as
U.S. central bank chief before Vice Chair Janet Yellen takes the
reins on February 1, said the program would likely wind down in
Williams - who was Yellen's research director at the San
Francisco Fed until her promotion to Fed Vice Chair in 2010 --
reiterated the chairman's message in the context of a largely
upbeat assessment of the recovery.
The U.S. economy will likely grow about 3 percent this year,
up from a 2.5 percent pace last year, Williams said, fueled by a
housing recovery that has been long in coming. With the recent
budget deal in Washington, further significant spending cuts are
unlikely, he said, and uncertainty is abating.
Inflation, currently about half the Fed's 2-percent goal,
has likely bottomed out and will move slowly back to target over
the next few years, he said. Add to that the encouraging signs
from the job market, he said, and the time was right to start
moving Fed monetary policy back to normal by reducing its bond
"We will likely continue to reduce the pace of those
purchases, and eventually eliminate them, over this year," said
Williams, who does not vote on the Fed's monetary policy
committee this year.
Even so, Williams said, the recovery still needs a boost.
Reiterating the Fed's promise to keep rates low until "well past
the time" that unemployment falls to 6.5 percent, as long as
inflation stays below the Fed's goal, Williams forecast rates
would stay near zero for the "foreseeable future."
"Things are definitely looking up," he said. "We're still not
where the economy should be, but we're well on the road to
recovery, and I see things getting better in the year the