Fed’s Williams: Economy Needs Open-Ended Stimulus

The economy needs another shot of Federal Reserve stimulus and this time around, it needs it indefinitely, said Federal Reserve Bank of San Francisco President John Williams

Since the 2008 financial meltdown, the Fed has rolled out two round of stimulus measures known as quantitative easing, which are asset purchases from banks that pump liquidity into the financial system.

A first round involving the purchase of $1.7 trillion largely in mortgage-backed securities from banks just after the 2008 financial crisis and a second round in 2011, which involved the purchase of $600 billion in Treasury holdings.
Such policies — designed to push down interest rates and encourage investing and borrowing — are needed anew, Williams said.

The economy grew 1.7 percent in the second quarter, according to the latest estimates from the Commerce Department, while unemployment rates stand at 8.3 percent.

“My view is that growth, without further policy action, will stay around the current level, around 2 percent through the rest of the year and just a little bit above that next year. So, without further accommodation, I see the unemployment rate basically staying where it is now — at around 8.25 percent — at least for another year and a half,” Williams told CNBC.

“So given our mandated goals of maximum employment and price stability, and given the fact that inflation is actually below our 2 percent objective — and I expect it to remain that way for the next couple of years — I think additional monetary accommodation would be very useful to help boost the economy, speed the recovery along somewhat and help get unemployment moving towards its full-employment goal.”

Meanwhile, further easing should come on an open-ended basis, meaning the Fed would announce plans to do what it takes as long as it takes to get the economy going again.

“In the past we have done the lump sum, the announcement of $600 billion of purchases over a fixed period of time. I think that worked well at that time. Personally, I think we should be moving towards what we call an open-ended approach basically saying instead of ‘here is a certain amount over a certain period of time’ that we will be purchasing assets at a certain rate and we expect to continue to do that for some time,” Williams said.

“A basic principle good monetary policy is you adjust policy based on what’s happening in the economy and the outlook. The open-ended approach allows you to do that better, I think.”

Economists have pointed out that quantitative easing carries diminishing returns, meaning the more it is used the less effective it is since it works by pushing down interest rates, which are already low enough as it is, though Williams suggested otherwise.

“The experience we have had with the various quantitative easing-type policies is pretty limited,” Williams said.

“I think right now our ability to estimate the effects is OK. We have a pretty good idea of the effects, but it’s hard to tell whether there will be diminishing returns.”

A recent CNNMoney survey of investment strategists finds that 93 percent said they don’t think the Federal Reserve should announce more stimulus at its next meeting, while 77 percent of economists surveyed agreed.

While past easing measures have steered the country away from deflationary collapse and might have halted the advance of rising unemployment rates, more intervention would likely produce little benefits while further applying inflationary pressures down the road.

“Nobody likes it when the punch bowl is taken away, but the party has gone on too long,” said Doug Cote, chief market strategist at ING Investment Management, according to CNNMoney.

“It’s time to get back to a normal economic recovery.”

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