–Progress On Bringing Down Unemp Rate Probably At Snail’s Pace, Stalled
–Severe Enough Europe Spillover Could Undo Progress In US Fincl Markets
By Brai Odion-Esene
WASHINGTON (MNI) – San Francisco Federal Reserve Bank President
John Williams Monday declared his dissatisfaction with progress on
tackling the nation’s jobs crisis, saying it is essential the central
bank provides enough monetary stimulus to maintain momentum towards
employment and price stability goals.
In remarks prepared for delivery to the joint convention of the
Idaho, Nevada, and Oregon Bankers Associations in Coeur d’Alene, Idaho,
Williams stressed the current economic environment requires
“extraordinary vigilance,” especially as events in Europe could knock
the U.S. financial system back into a crisis.
He also said the Fed’s $267 billion maturity extension program will
likely only have a “relatively modest” impact on the economy, and that
if the Fed does determine more stimulus is needed, it should purchase
longer-maturity securities, including agency mortgage-backed securities.
Williams is a voter on the Fed’s policymaking Federal Open Market
Committee this year, and he stressed that while the economy continues to
improve, the unemployment rate remains “much too high,” and economic
growth “is far short” of what is needed to keep bringing unemployment
down quickly.
“What’s more, the economy has lost some momentum in recent months
as gains in consumer and business spending have slowed,” he said, and
“financial markets are once more under strain in response to the
flare-up of the European crisis.”
Williams said not only is the Fed nowhere near meeting its mandate
of maximum employment, but his expectation of 1.25% inflation this year
and 1.75% in 2013 means it is lagging behind on its price stability goal
as well.
“I expect that we will make only very limited progress toward these
goals over the next year,” he said, and strains in global financial
markets raise the prospect that economic growth and progress on
employment “will be even slower than I anticipate.”
“In these circumstances, it is essential that we provide sufficient
monetary accommodation to keep our economy moving towards our employment
and price stability mandates,” he said.
“A prolonged economic slowdown would be a setback,” he warned.
Williams forecast the unemployment rate to remain at or above 8%
until the second half of 2013.
“What that means is that progress on bringing down the unemployment
rate has probably slowed to a snail’s pace and perhaps even stalled,” he
said.
But the biggest risk to the U.S. is outside its borders, with
Williams calling Europe “the most important wild card.”
He said his current expectation is for Europe’s “distressed
pattern” of the past two years to continue, but that the situation will
not spin out of control.
However, “If the spillover from Europe were severe enough, much of
the progress made in our own financial system could be undone. We might
find ourselves in a renewed credit crunch, which would take a terrible
toll on the economy,” he said.
“And the danger remains that uncertainty and fear will once again
outrun the slow-motion responses of European governments,” Williams
added.
Following its June meeting, the FOMC chose to extend ‘Operation
Twist’, but Williams cautioned that the program “will probably have a
relatively modest impact on the economy.”
“This is a period when extraordinary vigilance is demanded,”
Williams said, and if the Fed does decide to take further action, he
argued that the most effective tool would be additional purchases of
longer-maturity securities, including agency mortgage-backed securities.
“These purchases have proven effective in lowering borrowing costs
and improving financial conditions,” he said.
Commenting further on the domestic front, Williams noted the pace
of growth has been “frustratingly slow” and there has been a loss of
momentum in recent months.
He said the slowdown in domestic demand and global strains in
financial markets have led him to lower his outlook for growth, now
predicting real GDP rising “a little less” than 2% this year, and by
about 2.25% in 2013.
Williams warned that the budget squeeze at all levels of government
is a significant development weighing on the economy, “and there is no
relief in sight.”
All eyes are on the looming fiscal cliff and the likely
contractionary effect it will have on the U.S. economy if Congress fails
to reach an agreement.
“There’s a risk that federal cutbacks could be more dramatic than I
expect,” Williams said. “Nevertheless, federal budgetary policy is
moving toward greater belt tightening, and this austerity will dampen
growth next year,” he added.
Still, all is not gloom and doom, and there are some signs of
improvement.
Williams noted that the combination of Europe and slowing demand in
the U.S. have not brought the recovery’s forward motion to a halt.
Credit conditions overall have improved, he said, while pent up
business and consumer demand is returning, albeit at a slower pace
compared to earlier in the year.
And despite being “deeply depressed,” the housing sector is
starting to show “signs of life,” Williams continued, with a number of
economic data hinting that “we may be turning a corner.”
** MNI Washington Bureau: 202-371-2121 **
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