Fed's Williams (dove, FOMC non-voter): Opposes new threshold to replace 6.5% unemployment, reiterates Fed needed to change its guidance very soon as unemployment has already fallen to 6.6% - FT interview
- New forward guidance should be verbal, be backed up by the Fed economic forecasts.
- Risky to try to distil the complex set of issues about monetary policy, including potential concerns about financial stability, down to one metric.
- Risky to try to distil the complex set of issues about monetary policy, including potential concerns about financial stability, down to one metric.
FT : SF Fed president wants new verbal rate guidance ‘very soon’
The brief heyday of numerical forward guidance on interest rates is ending, as an influential US Federal Reserve official told the Financial Times he opposes a new number to replace its 6.5 per cent unemployment threshold for rate rises.
John Williams, president of the San Francisco Fed and a former research director for chairwoman Janet Yellen, said in an interview that the Fed needed to change its guidance “very soon” as unemployment has already fallen to 6.6 per cent.
But he said the new guidance should be verbal, backed up by the Fed’s economic forecasts. With a number, “we’d have the same problem we have now – everyone would be looking at this one metric, the unemployment rate,” said Mr Williams.
“As we get closer to reaching our goals, I think that the risks of trying to distil the complex set of issues about monetary policy, including potential concerns about financial stability, down to one metric – the cost of that and the potential confusion is just greater than the benefit.”
The remarks by Mr Williams, who is not a voting member of the Fed board this year, reflect a swell of opinion among central bankers that numerical forward guidance is useful when an economy is struggling but could become a straitjacket as it gets closer to full employment.
The Bank of England recently gave verbal guidance about what it will do once unemployment falls below its own threshold of 7 per cent. The Fed may do something similar at Ms Yellen’s first meeting in charge on March 19.
In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.
“At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”
He noted that the Fed plans to keep rates low for a considerable time after it stops buying assets – so far, it has only tapered purchases from $85bn to $65bn a month – and that provides extra guidance about the earliest moment for a rate rise.
Mr Williams said it would take a “substantial change in the outlook” before he was willing to revisit the Fed’s plan to slow purchases by $10bn at each meeting, and despite some weak data, that has not yet happened. “We haven’t really changed our basic outlook for the economy.”
A lot of the patterns in the recent data are consistent with the patterns of unusually bad winter weather, he said. “So far we’re not taking a lot of signal from the last couple of months, and we tried not to get too enthusiastic about the really strong data in the months before that.”
Mr Williams said that as long as average monthly jobs growth stays well above 100,000 then unemployment will continue to come down. “What would worry you is if you don’t have an explanation for why it’s weaker and you get multiple months below that,” he said.
If inflation does not rise back towards the Fed’s 2 per cent goal, however, or the economy slows to a point where it is not creating enough jobs then Mr Williams would not only support a delay in the taper but “in certain circumstances it could make sense to increase the purchases again”.