Economy & Finance

Fed should cap bond buys when confident on momentum: Williams

SAN FRANCISCO (Reuters) – The Federal Reserve should wait for stronger evidence of economic momentum before pulling back on its massive bond-buying program, but should then announce a definitive end to the stimulus, a top Fed official said on Tuesday.

“Once you are kind of clear that the program has achieved its goals, (that) we’ve gotten the substantial improvement” in the labor market outlook that was sought, the U.S. central bank should “announce we’re planning to stop the purchases over the next ‘n’ months and finish with a certain amount of purchases,” John Williams, president of the San Francisco Federal Reserve Bank, told reporters at the close of the bank’s Asian Economic Policy Conference.

“Instead of leaving it out in the open to say, ‘Let’s see how it goes,'” he said, the idea would be to “switch in a way at the end of it from the open-ended to the more closed-ended” style of bond-purchases that the Fed followed in its first two rounds.

“That may be a way to ease this kind of difficult communication challenge of tapering and all that, which has been much worse than I could have imagined,” he said.

Philadelphia Fed President Charles Plosser, a hawk who opposed the Fed’s current round of bond buys from the start, last week floated the idea of eventually capping the program.

With Williams, a policy centrist, also embracing the idea, such an approach may be gaining some footing among policymakers.

The U.S. central bank is buying $85 billion in Treasury and mortgage bonds per month in an effort to boost investment, hiring and growth. The program started in September 2012 and is the Fed’s third such quantitative easing (QE3) effort.

Unlike its prior two rounds of bond buying, the current program is “open-ended,” without a set total of purchases, and without a set end date.

This past June, in an effort to provide more clarity to markets about the program, Fed Chairman Ben Bernanke said the Fed would likely begin cutting bond purchases later this year and end them in mid-2014, when he said the unemployment rate would likely be around 7 percent.

Investors drove up market rates in response, as they bet that an end to the bond-buying would be followed by an increase to the short-term rates that the Fed has kept near zero since December 2008.

But the Fed’s forecasts did not hold up.

While unemployment has dropped to 7.2 percent, inflation has remained stubbornly below the Fed’s 2 percent target, and economic growth has fallen short of expectations.

Last month the Fed voted to keep its bond-buying program constant, and now many economists do not expect it to begin to withdraw stimulus until next year.

Williams, who earlier this year thought the Fed might be able to end its bond-buying program by the end of 2013, on Tuesday declined to give any indication of when he believes the Fed will be ready to reduce bond buying.

Instead, he said, the decision will depend entirely on the economy, whose performance in recent months has been disappointing, he said.

“I want to see this economy have a pretty convincing case this economy can grow well above trend, create enough jobs to bring unemployment down without additional monetary stimulus – that would be the situation I would think that tapering, bringing our current purchase program to an end would be appropriate,” he said.

“We are not there yet.”

(Reporting by Ann Saphir- Editing by Leslie Adler and Phil Berlowitz)

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