–December Jobs Report Not In Any Way A ‘Game Changer’

By Brai Odion-Esene

VANCOUVER, Washington (MNI) – The strong likelihood that U.S.
economic growth in the first quarter will come in weaker vs. the last
quarter, while the unemployment rate remains stubbornly high, will
provide grounds for the Federal Reserve to engage in additional monetary
stimulus, San Francisco Federal Reserve President John Williams said

Speaking to reporters after a speech at The Columbian’s 2012
Economic Forecast Breakfast, Williams said if his forecasts for economic
growth, inflation and the unemployment rate are realized, then the Fed
will have grounds to engage in further stimulative action.

“My forecast is that inflation will dip down to below 1.5% this
year,” he said, “and stay around there next year. I expect unemployment
to come down very gradually and still remain well above full employment
for several years.”

“If that’s realized, that makes a case for adding a stimulus,” he
said. This is where the projections regarding the future path of
interest rates would come in, he added. “That would suggest a policy
that would be more stimulative than otherwise.”

Other policy actions include possibly conducting additional asset
purchases. “I think, again, if this forecast proves to be the right one,
then there’s a strong argument for going to purchase more
mortgage-backed securities down the road,” Williams said.

He argued that inflationary pressures in the U.S. “are ebbing,” and
moving to be “too low.” Meanwhile the good growth seen in that period,
along with the good jobs numbers, “are temporary bouncebacks from
earlier weakness in 2011 and don’t reflect much stronger growth.”

“I personally don’t expect GDP growth will be that strong in the
first quarter of this year,” Williams said, predicting that growth will
slow “quite a bit” from the fourth quarter.

“As that data come in and confirm that story, that would make a
stronger argument for doing more stimulus,” he said.

“We are in unchartered waters in terms of the economy, the economic
challenges we are facing, in terms of the monetary policy decisions we
are making,” Williams said.

As for December’s strong jobs report, Williams said while it was a
positive sign, “to me it wasn’t in any way a game changer.”

“There’s obviously a lot of uncertainty about what’s going on in
the economy, what the best policy choices are,” he added. As a result
there will be a range of views this year as to the best course of action
among members of the FOMC.

Williams said he is still debating how to interpret what is
happening in the economy and what is the best action to take.

The Fed plans to include the interest rate projections of FOMC
members in its quarterly economic forecasts from its January FOMC
meeting onwards, and Williams said this will provide greater clarity and
a more nuanced view of “our policy reaction function and our thinking.”

It would also add to the Fed’s effectiveness given that its target
rate is at the zero bound, he said.

Williams also said the Fed can be clearer with regard to its
targets for maximum employment and price stability. He sees an
unemployment rate of 6.5% or a little below as consistent with price

He added that monetary policymakers should also provide more
clarity regarding their desired rate of inflation over the medium term,
arguing that it makes “complete sense.”

In the audience q&a portion of his appearance, Williams noted that
while the Fed sets interest rates for the United States as a whole,
there are parts of the country that are faring better economically than

“Obviously there is a great deal of dispersion in how different
parts of the country are doing, and monetary isn’t … it can’t cope
with that,” Williams said.

So how to boost the areas that continue to struggle? “I’d go back
to the policies that are trying to help resolve the housing problems
more quickly in terms of foreclosures, in terms of the fact that a lot
of the banks are taking over real estate that’s not getting back into
the market quickly, not being used for rentals,” he said.

So policies are needed at the local, state and federal levels to
speed up the “glacial” resolution of housing problems and make it more
efficient, Williams said.

He noted that despite the Fed’s success in forcing mortgage rates
down to historical lows, many borrowers are not being granted the
opportunity to refinance their loans.

As a result, he is in favor of government policies that would
expand the pool of borrowers eligible to refi — such as the Obama
administration’s HARP 2.0.

** Market News International **

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