–Missing Targets on Employment and Inflation Mandate

By Steven K. Beckner

(MNI) – San Francisco Federal Reserve Bank President John Williams
said Wednesday the Fed is “missing” on both of its statutory mandates
and hence needs to “keep the monetary policy throttle wide open.”

Not only is the unemployment “very far” from “maximum employment”
levels, but inflation is too low relative to the Fed’s 2% target, said
Williams, a voting member of the policymaking Federal Open Market
Committee.

And so it is imperative the Fed strive to return employment and
inflation to “mandate consistent” levels “quickly to minimize total
economic damage,” he said in remarks prepared for delivery to Claremont
McKenna College in Claremont, California. The longer the Fed misses its
objectives the worse the damage will be, he warned.

Williams once again seemed to be strongly suggesting an openness to
further monetary stimulus, saying “everything points in the same
direction.”

Speaking last Wednesday, in San Ramon, California, Williams said,
“Looking ahead, we may still need to provide more policy accommodation
if the economy loses momentum or inflation remains well below 2%. Should
that occur, restarting our program of purchasing mortgage-backed
securities would likely be the best way to provide a boost to the
economy.”

Later, he told reporters he would support a third round of
quantitative easing if the economy continues to grow below trend, if
“we’re not making progress on unemployment” and if inflation runs “well
below target.” And he said new MBS purchases would be the “natural next
place” for the Fed to look because there is “more headroom” in the MBS
market than in the Treasury market.

In his speech Monday, Williams said there are times when the Fed’s
maximum employment and price stability objectives are “in conflict,” as
when an oil price shock cools the economy even while creating price
pressure. In such a case, he said the Fed must make “trade-offs.”

Quoting from the FOMC’s Jan. 25 statement of goals and strategy, he
said, “‘the Committee seeks to mitigate deviations of inflation from its
longer-run goal and deviations of employment from the Committee’s
assessments of its maximum level.'”

But “if the Committee judges that these goals are in conflict in
the short run, then, quote, ‘it follows a balanced approach in promoting
them, taking into account the magnitude of the deviations and the
potentially different time horizons over which employment and inflation
are projected to return to levels judged consistent with its mandate,'”
Williams said, citing the statement.

“In other words, we look at how much unemployment and inflation are
deviating from ideal levels,” he said. “And we consider how long it is
likely to take them to return to ideal levels.”

But that is not the circumstance the FOMC faces now, Williams
stressed. At 8.3%, he said the unemployment rate has veered very far
from mandate consistent levels, noting that the FOMC’s long-run estimate
of the “natural” rate of unemployment is 5-6%.

Currently, he put the natural rate in the 6% to 7% range, but said
that is “higher than usual because of the damage the recent recession
did to the efficient functioning of the labor market … In fact, the
gap between unemployment and our natural rate estimates has been larger
than at any time in the past 25 years.”

Meanwhile, he said “inflation in 2012 and 2013 is likely to come in
around 1-1/2%, below the FOMC’s 2% target.”

“This is a situation in which there’s no conflict between maximum
employment and price stability,” Williams said. “With regard to both of
the Fed’s mandates, it’s vital that we keep the monetary policy throttle
wide open.”

“This will help lower unemployment and raise inflation back toward
levels consistent with our mandates,” he said. “And we want to do so
quickly to minimize total economic damage. The longer we miss our
objectives, the larger the cumulative loss to the economy.”

Williams did not say what more the Fed should do or when, but
seemed to imply the need for further Fed action.

“This is truly an extraordinary time for monetary policy,” he said.
“I’ve talked about some of the tradeoffs central bankers face. But I
don’t see such tradeoffs today.”

“Now is one of those moments when everything points in the same
direction,” he said. “The Fed is committed to achieving maximum
employment and price stability. And we’re doing everything in our power
to move towards those goals.”

** Market News International Washington Bureau: 202-371-2121 **

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