Fed's Williams: 'still too early' to reduce QE3

By Ann Saphir

ROHNERT PARK, California (Reuters) - The Federal Reserve should not yet cut back on its massive bond-buying stimulus program, a top Fed official said on Friday, despite a stronger-than expected U.S. recovery and indications that the job market will continue to improve.

"Is it time to act? My answer is that it's still too early," San Francisco Federal Reserve President John Williams said in remarks prepared for delivery to the Sonoma County Economic Development Board.

The remarks were a turnaround for the centrist policymaker, who in May said that if the recovery continued to improve as expected, the Fed could start trimming its $85 billion-a-month bond-buying program by summer, and end it before the year is out. The purchases are designed to drive down long-term borrowing costs and encourage growth and hiring.

"For one thing, we need to be sure that the economy can maintain its momentum in the face of ongoing fiscal contraction," Williams said, citing the drag from Europe as a second risk to the U.S. recovery. "And it is also prudent to wait a bit and make sure that inflation doesn't keep coming in below expectations, possibly signaling a more persistent decline in inflation."

On Friday, Williams largely reiterated his forecast from May, saying he expects unemployment to fall to about 7.25 percent by the end of this year and to 6.75 percent by the end of next year, helped by inflation-adjusted growth in GDP of 2.25 percent this year and 3.25 percent next year.

Inflation, he predicted, will gradually rise from well below the Fed's 2-percent target now to about 1.75 percent in 2015.

"Looking ahead, if this forecast holds true, then at some point it will be appropriate to scale back our purchase program and eventually end it," Williams said.

By omitting a time frame for a dial-down of the Fed's asset purchases, Williams is no longer publicly at odds with the view set out last week by Fed Chairman Ben Bernanke, who said the U.S. central bank could start reducing the bond buys later this year and end them by mid-2014.

That relatively near-term timeline for the end of the Fed's third round of quantitative easing, or QE3, sent bond yields rising as investors began pricing in an earlier end to low interest rates.

Williams used his speech to fend off that notion, saying that any end to bond-buying stimulus would not change the Fed's promise to keep rates low until unemployment falls to at least 6.5 percent, as long as inflation stays contained.

He also reiterated the Fed's view that reducing bond purchases does not mean the Fed is tightening policy, and its vow to change its plans to reduce the program if economic data falls short of expectations.

"The good news is that the economy is on the mend," he said. When the time comes for the Fed to stop adding stimulus by buying long-term bonds, "I am confident that we can make this change without jeopardizing the recovery, while working toward our goals of maximum employment and price stability."

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

Source: http://news.yahoo.com/feds-williams-still-too-early-reduce-qe3-193144980.html

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