Sunday 25 September 2011

Williams raises questions on Fed's latest moves (Reuters)

CHICAGO (Reuters) – Just days after the Federal Reserve launched a new round of unconventional monetary policy easing, a top Fed official with a record of supporting such moves questioned how well they can boost the recovery.

Large-scale bond purchases and pledges to keep short-term rates low for a set period like those the Fed has made are effective at lowering long-term borrowing costs, San Francisco Federal Reserve Bank President John Williams told the Swiss National Bank Research Conference on Friday.

"Specifically, does lowering Treasury yields through large-scale asset purchases have the same effect on the economy as an equivalent movement in the federal funds rate?" Williams said in the speech calibrated to spark debate rather than provide answers. "To what extent is it the size or the composition of the central bank's balance sheet that matters?"

The question of the effectiveness of unconventional monetary policy tools is critical to the U.S. central bank, which has increasingly relied on such tools to try to kick-start a recovery from the worst recession in decades.

After cutting short-term interest rates to near zero in December 2008, the Fed turned to large-scale asset purchases, buying a total of $2.3 trillion in Treasuries and mortgage-backed securities through June of this year.

Those programs, along with the Fed's pledge to keep rates low for an extended period, were effective in reducing both short-term and long-term borrowing costs, Williams said.

Dogged by a persistently high unemployment rate that stood in August at 9.1 percent, the Fed last month said the economy was so weak it was likely to need the support offered by near-zero short-term rates until at least mid-2013.

Williams, who is not a voter this year on the Fed's policy-setting panel, supported that move, and earlier this month suggested there was room for further easing.

On Wednesday the Fed moved to counter what it called "significant downside risks" to the economy, embarking on a new $400 billion program to weight its $2.85 trillion balance sheet more heavily toward longer-term securities.

World stocks fell after the announcement, on worries that such policies may not be enough to stop the U.S., and other countries from tipping into a new recession.

ANEMIC RECOVERY

Speaking in Washington, another Fed official, New York Fed President William Dudley, blamed the build-up of debt before the financial crisis for an "unusually anemic recovery," and said regulators need to profoundly overhaul the financial system to prevent the advent of new crises.

He did not comment on the Fed's recent action, which drew three dissents from Fed policy-panel members who opposed further easing.

Neither did Williams, but his comments provided some insight into the debate raging behind the Fed's closed-door policy-setting meeting this past Tuesday and Wednesday.

"What are the advantages of targeting a specific quantity of large-scale asset purchases as opposed to targeting a level of ceiling on interest rates at a particular point on the yield curve?" he asked. "How do these policies change our thinking about the optimal rate of inflation?"

Williams said he had no answers, but noted that finding them will be critical to future monetary policy success.

(Reporting by Catherine Bosley; additional reporting by Mark Felsenthal and David Clarke in Washington. Writing by Ann Saphir in Chicago)

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