–Vital Fed Uses All Tools To Achieve Dual Mandate
–U.S. Unlikely To Escape Unscathed If EU Leaders Fail To Solve Problems

By Brai Odion-Esene

VANCOUVER, Washington (MNI) – A “notably weak” economic recovery
will not be enough to lower an unemployment rate that remains
“shockingly high,” meaning the Federal Reserve and fiscal policymakers
must continue to do all they can to bring about a stronger rebound in
economic activity, San Francisco Federal Reserve President John Williams
said Tuesday.

“I expect the pace of economic growth to be frustratingly slow and
the unemployment rate to remain very high for years to come,” Williams
said in prepared remarks at The Columbian’s Economic Forecast Breakfast
in Vancouver, Washington.

What is needed are “tax and spending policies that work together
with Federal Reserve programs to stimulate the economy,” he said.

Williams also warned that should Europe fail to deal with its
unresolved sovereign debt woes, the United States is unlikely to escape
“unscathed.”

As for domestic conditions, “the level of unemployment is a
national calamity that demands our attention,” Williams said.

But in the current climate of reduced government spending and
efforts to lower the deficit — austerity that William said is damping
the economy, not boosting it — “it’s vital that the Fed use all the
tools at its disposal to achieve its mandated employment and price
stability goals,” he said.

Despite the federal funds rate being close to zero since 2009,
Williams stressed the central bank is not out of ammunition. He noted
that in December, the Fed’s policymaking body — the Federal Open Market
Committee — decided to start reporting members’ expectations for the
likely future course of short-term interest rates.

“This should reduce public uncertainty and confusion about our
thinking and our plans regarding monetary policy,” Williams said, adding
“Another step toward more transparency and accountability could include
laying out more explicitly our policy strategy and our longer-run
goals.”

Williams argued that action is still required from policymakers
because of forces that have sapped the recovery of its vigor.

Foremost among those forces is housing, with the San Fransisco Fed
chief noting that with the market so distressed, there is little sign
that homes prices are set to rise.

“Housing has been at the center of the crisis and is one of the big
impediments to recovery. I’d like to see federal programs that support
the housing market,” Williams said, adding his voice to a growing number
of Fed officials calling on Congress to take firm steps to aid this
struggling sector.

Aside from housing, Williams noted that while credit conditions
have eased for corporations, the going remains tough for households and
small businesses.

In addition, the uncertainty pervading the economy is having a
“depressing effect” on spending and investment.

“Businesses are uncertain about the economic environment and the
direction of economic policy. Households are uncertain about job
prospects and future incomes. Political gridlock in Washington, D.C.,
and the crisis in Europe add to a sense of foreboding,” Williams said.

He added that economists at the San Francisco Fed calculate that
uncertainty has reduced consumer and business spending so much that it
has potentially added a full percentage point to the unemployment rate.

Providing his forecasts for this year and 2013, Williams projected
economic activity in 2012 to expand by nearly 2.5% and about 3% in 2013,
in line with his expectation of a moderate growth pace.

This, however, will not be enough to make a dent in the ranks of
the jobless, with Williams expecting the unemployment rate to remain
over 8% well into next year and still be around 7% at the end of 2014.

And an escalation in the European debt crisis would cause the U.S.
economy to perform much worse, Williams warned.

“European leaders have been working to solve this problem and they
may be able to muddle through. But, if they fail, all bets are off. The
agreement binding together the countries that use the euro could break
up, sending shock waves through financial markets around the world.
Under such circumstances, the United States could hardly escape
unscathed,” he said.

Opponents of aggressive action by the Federal Reserve have argued
that it will cause inflation to soar but Williams said “that simply
hasn’t happened.”

He added there is no sign that the public or financial markets
expect inflation to rise much, and said he expects inflation to come in
under 1.5% this year and next, down from about 2.5% percent in 2011.

“That would put inflation a bit below the rate of about 2% that
most Fed policymakers consider healthiest,” Williams said.

** Market News International **

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