–Time For Fed Tightening Is Still ‘Well Off In The Future’
–Expects Moderate Growth;Won’t Sustain Current Rapid Jobs Progress

SAN FRANCISCO (MNI) – San Francisco Federal Reserve Bank President
John Williams Wednesday reiterated his belief that a stubbornly high
U.S. unemployment rate and a sluggish recovery means it is “essential”
that the Federal Reserve maintains its highly accommodative monetary
stance.

“The Fed has acted vigorously to boost the economy. It’s critical
that we keep doing so in order to achieve our statutory mandate,” he
said, echoing comments made in a speech to the University of San Diego
School of Business Administration Tuesday.

Speaking at the San Francisco Planning & Urban Research Business
Breakfast Series this time, Williams — a voter on the Federal Open
Market Committee this year — said high unemployment, restrained demand,
and idle production capacity are affecting the recovery on a national
level, and “these are just the sorts of problems monetary policy can
address.”

“It’s essential that we keep strong monetary stimulus in place,”
Williams said, especially as the country is “far below” maximum
employment and is likely to remain there “for some time.”

Williams forecast the U.S. economy will grow by about 2.5% this
year and 2.75% in 2013. “That’s not overdrive, but it does represent
improvement,” he said.

However, despite the positive news from the labor market, “the kind
of moderate economic growth I expect won’t sustain such rapid progress,”
Williams said.

“I expect unemployment rates to remain around 8% through year-end.
And we’re still likely to be around 7% at the end of 2014,” he added.

Williams noted the argument made by some that the high jobless rate
is because of a skills mismatch that has driven up the natural rate of
unemployment, meaning the current 8.3% unemployment rate is not far off
the natural rate.

“I’m not convinced,” Williams countered, arguing that research by
both the New York and San Francisco Fed banks suggest the job mismatches
are limited in scope.

“Now, other factors besides skill mismatches may also have helped
push up the natural unemployment rate,” he said, adding that over the
longer term, “mismatches and other labor market inefficiencies may have
raised the natural unemployment rate from about 5% to around 6 to 6.5%.”

“So, in my view, the nation remains far from the Fed’s goal of
maximum sustainable employment,” Williams said.

And while some Fed officials say the recent bout of improved
economic data might mean the Fed tightening policy sooner than it
currently projects, Williams said that time “is still well off in the
future.”

Williams’ willingness to keep monetary stimulus in place appears to
be fueled in part by the Fed’s performance with regard to its other
mandate, price stability.

With his expectation that inflation will be near the Fed’s 2%
target this year and down to about 1.5% in 2013, “we’ve succeeded pretty
well on that score,” Williams said.

** MNI **

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