By Steven K. Beckner
BELLEVUE, Wash. (MNI) – San Francisco Federal Reserve Bank
President John Williams said Wednesday that the Fed should “stand ready
to do even more” monetary easing if the outlook for economic growth,
jobs and inflation deteriorates further.
Williams said that, as it is, he foresees the Fed “falling short”
of both its “maximum employment” mandate and its desire to keep
inflation at 2%, instead of falling below that target. And so he said it
is “crucial” to keep monetary policy “highly stimulatory.”
But that may not be enough if his already modest outlook for
economic growth and employment dims because of “looming threats” from
Europe and from fiscal retrenchment stateside, he said in remarks
prepared for delivery to a community leaders gathering hosted by the
Seattle branch of the San Francisco Fed.
Williams, a voting member of the Fed’s policymaking Federal Open
Market Committee, said the Fed would need to do a third round of
large-scale asset purchases or “quantitative easing” in that event.
He gave no timeframe for providing additional monetary stimulus two
weeks ahead of the June 19-20 FOMC meeting, but he suggested the FOMC
may have to be nimble, given the “highly uncertain times.”
“At the Fed, we must be vigilant, and ready to adjust monetary
policy as circumstances warrant,” he said.
Williams emphasized the Fed’s “dual mandate” of achieving both
maximum employment and price stability. He put particular stress on the
former, but also suggested that the Fed might have to respond to
Even if the “natural” rate of unemployment is an elevated 6.25%, he
said “we are very far from our maximum employment mandate.” Based on
projected real GDP growth of 2.25% this year and 2.5% next year, he said
he expects the unemployment rate to be “above 7% until late 2014.” And
he said, “I don’t expect we’ll be at maximum employment until 2016.”
Meanwhile, on the price stability side of the dual mandate,
Williams said, “I expect inflation to come in below the 2% target both
this year and in 2013″ mainly due to the “weak job market” and
“contained” labor compensation.
“In sum, I see the Fed falling short on both our maximum employment
and inflation mandates for some time,” he said. “And the turmoil in
Europe and government fiscal retrenchment in the United States raise the
danger that the economy could perform worse than I expect.”
“For these reasons, it’s crucial that we maintain our current
highly stimulatory monetary policy stance,” he said.
“We must also stand ready to do even more if needed to best achieve
our statutory goals of maximum employment and price stability,” Williams
“If the outlook for growth worsens to the point that we no longer
expect to make sustained progress on bringing the unemployment rate down
to levels consistent with our dual mandate, or if the medium-term
outlook for inflation falls significantly below our 2% target, then
additional monetary accommodation would be warranted,” he said.
“In such circumstances, an effective tool would be further
purchases of longer-maturity securities, potentially including agency
mortgage-backed securities,” he continued. “Past purchases have
succeeded in lowering borrowing costs and improving financial
conditions, thereby supporting economic recovery.”
Williams prefaced those assertions with a mixed, but mostly gloomy
assessment of the economic outlook, heavily tinged with concern about
the European debt crisis.
He cited signs of improvement in housing, auto sales and credit
markets, but swiftly shifted gears to dwell on downside risks.
“The fiscal burden on the economy could turn significantly worse at
the end of this year, when federal spending cuts and tax increases are
scheduled to kick in,” he said, adding that even if Congress acts to
avert automatic tax hikes and spending cuts, “federal fiscal policy is
moving toward greater belt tightening, and that will put a significant
drag on economic growth next year.”
Turning to the European sovereign debt crisis, Williams said
“Europe’s prospects are vitally important to the United States” because
of both trade and financial ties.
Already, he said “Europe’s economic slowdown is limiting demand for
Williams conceded that the flight out of Europe into U.S. Treasury
securities has pushed Treasury yields to very low levels that “help U.S.
“However, other spillovers from Europe are offsetting these
benefits,” he said. “The flow of money to the United States has boosted
the value of the dollar, which makes our goods and services more
Williams also pointed to the decline in U.S. stock and bond values
caused by the European risk aversion. “Lower stock prices and higher
credit costs weigh on both the willingness and the wherewithal of
American consumers and businesses to spend,” he said.
Noting that the Greek crisis has spread to Spain, Williams had
urgent words of advice.
“The Spanish banking system needs to be recapitalized on a large
scale,” he declared. “Failure to do so would undermine confidence in the
banking system, and that could lead to a run on the banks.”
“Spain would then find itself in a massive credit crunch, further
damaging the economy,” he said.
“If the government can make a convincing case that it will do
what’s necessary to back the banking system while meeting its own debt
obligations, things can work out,” he went on. “But, if doubts arise,
then the government’s borrowing costs could skyrocket, making it
impossible to meet its goals. Without a viable backstop from its
European partners, the fear of such an outcome could become a
“A development that on its own might not be disastrous, such as
another Greek default or even its abandonment of the euro, could set off
contagion that would undermine confidence in other countries,” Williams
warned. “The effects could overwhelm private credit markets in Europe,
causing a financial meltdown comparable to what we saw here during the
“Needless to say, if that were to happen, the U.S. economy would be
harmed on a number of levels,” he said. “Our trade with Europe would
suffer greatly. And our financial markets would be severely strained.”
Earlier, Williams fellow voter Dennis Lockhart, president of the
Atlanta Fed, said he thinks monetary policy is “appropriate” for the
time being, given his forecast of “moderate growth,” a “slow” decline in
unemployment and inflation near the Fed’s 2% target. But he said there
are conditions under which he would favor additional monetary stimulus.
Lockhart, considered a middle-of-the-road policymaker, emphasized
that his forecast does not incorporate “the full potential impacts of a
downside scenario related to Europe, a global economic slowdown, or some
other externally-sourced shock.” And he said the May employment report
illustrates that “there continues to be a halting and tenuous character
to the recovery.”
Lockhart made clear he would favor additional easing if an already
tepid economic outlook were to cool further. “Should it become clear
that something resembling my baseline scenario of continued, though
modest, growth is no longer realistic, further monetary actions to
support the recovery will certainly need to be considered.”
** MNI **