By Denny Gulino

WASHINGTON (MNI) – The San Francisco Federal Reserve Bank’s new
President John Williams Wednesday night saw few economic positives in
the near future and said slow, steady improvement will take several
years to restore full employment.

Answering questions after a speech at his Bank to economics
professors, Williams acknowledged that low interest rates have not done
their usual job of boosting housing, as has been well illustrated in his
geographic region.

Overall, “The current quarter looks a little better” than the first
quarter, and that the Bank’s forecast is for an “around 3%” growth rate
for 2011, fourth quarter over fourth quarter, he said.

“The unemployment rate today is 9%, which is extraordinarily high,”
he continued. “With a 3% growth we would expect unemployment to end the
year around maybe 8.5%, which is still well above most estimates and our
estimate of full employment.”

In fact, he added, “I don’t see us getting to what we think of
currently as full employment for several more years.”

The economy remains “in a deep hole,” he said. “The fundamental
problem is we’re trying to dig out of this deep hole. Because of the
financial crisis, because of, I think, a lack of confidence both in
households and in businesses, a typical pattern after financial crisis
is a very gradual slow recovery.”

The Fed, in his view, is not pressured by encroaching inflation
despite the energy price spike and sees the inflation rate still below
the Fed’s objective going forward.

“We don’t see energy prices rising that much, and of course they’ve
fallen recently,” he said. “So we see overall inflation after having
this bump up in the first half of the year coming back down to around
1.5% growth rate. So thinking about next year, the PCE inflation around
1.25% to 1.5% — which is a little bit below I think what the Fed
typically thinks of as its longer term objective.”

Housing, he said, continues as “one of the big drags on the
economy.” Typically housing responds to low rates but this time, while
low rates puts a “floor” on how low housing could go, “we’ve seen in the
housing market a disappointing period over the last year where the
housing market instead of stabilizing at a low level and maybe next year
or so turning back, continues to kind of probe low weak levels.”

In 2012 and 2013, “I think we’re eventually going to see a return
and getting back to more normal levels but not in the very near future,”
he said.

There has been some slight improvement in some areas in the rental
housing market, he said.

Williams answers were provided to reporters across the country via
an audio feed.

On U.S. fiscal policy, Williams said he worries about a crisis if
the debt limit is not raised and there is a possibility of a U.S.
default but at the same time, there is a need for long-term fiscal
planning.

“The Treasury security market is the biggest, thickest, most
important market out there,” he said. “Taking the risk of an actual
default or some undermining of confidence in the Treasury market I think
would be very damaging.”

He continued, “That said, for the long-run health of the U.S.
economy — and we’re seeing this in Europe obviously — we need to get
our fiscal house in order.” Household and business confidence would
improve if “the political leaders could come to an agreement to deal
with our longer-term unsustainable deficit I think that would be very
good for the short-run economy.”

On Europe, “We’re seeing a similar dynamic there where these
countries, the peripheral countries such as Greece, Portugal and Ireland
and others, many countries in Europe, need to deal with their problems,”
he said.

“At the same time it’s a very delicate time,” he continued. “You
don’t want to have a crisis emerge or a contagion grow across Europe.”

While the ECB, the IMF, the EU and the governments are trying to
resolve the problems, “but that’s obviously a risk, not only to the
European economy but to the global economy.”

On inflation, the Fed closely monitors a broad array of indicators
of inflation expectations, he said. “It’s actually amazing how well
anchored inflation expectations have been for the last five years given
all those wild swings in commodities prices, overall inflation, the
financial crisis.”

“It is striking, relative to past experience,” he said, “that in
the U.S. and the euro area and the U.K. despite these huge shocks and
huge events we’ve seen inflation expectations remain reasonably well
anchored and stay in a range similar to what we saw right before the
crisis. And I think that’s a big success for monetary policy.”

Williams, once an economic professor himself, said in his speech
that economics textbooks need to catch up to reality and leave 1950s
concepts behind. These days, he said, the monetary base can be increased
200% and the monetary aggregate M2 in turn expands only 19%.

“Can’t the resulting huge increase in the money supply overheat the
economy, leading to higher inflation? The answer is no,” he said, “and
the reason for this is a profound, but largely unappreciated change in
the inner workings of monetary policy.”

** Market News International Washington Bureau: 202-371-2121 **

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