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Wednesday, April 03, 2013

Fed's Williams: Expects to Meet "test for substantial improvement in the outlook for the labor market by this summer"

by Calculated Risk on 4/03/2013 04:05:00 PM

From San Francisco Fed President John Williams: The Economy and the Federal Reserve: Real Progress, but Too Soon to Relax

In the statement issued following the March meeting, our policy committee, the Federal Open Market Committee, or FOMC, stated that it would continue its securities purchases “until the outlook for the labor market has improved substantially in a context of price stability.” It also stated that “in determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

So, what does that mean? I see the benefits of our asset purchases continuing to outweigh the costs by a large margin. I expect that continued asset purchases will be appropriate well into the second half of this year. In making this assessment, I don’t have a specific unemployment or job-gain threshold in mind for cutting back or ending these purchases. Instead, I’m looking for convincing evidence of sustained, ongoing improvement in the labor market and economy. The latest economic news has been encouraging. But it will take more solid evidence to convince me that it’s time to trim our asset purchases. An important rule in both forecasting and policymaking is not to overreact to what may turn out to be just a blip in the data. But, assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.

It’s important to note that tapering our purchases and even ending the purchase program doesn’t mean that we are removing all the monetary stimulus that comes from our longer-term securities holdings. Instead, even as we cut back our purchases, we’re still adding monetary accommodation and exerting greater downward pressure on interest rates. Economic theory and real-world evidence indicate that it’s not the pace at which we buy securities that matters for influencing financial conditions. Rather, it’s the size and composition of the assets we hold on our balance sheet. So, even when we stop adding to our portfolio, it doesn’t mean we’re tightening policy.
emphasis added
Williams is a key player on the FOMC and I always pay attention to his remarks. Of course the economy could weaken over the next few months, as Williams notes: "There are still obstacles to our progress, including the effects of budget cuts coming out of Washington and the sluggish recovery plaguing many of our trading partners abroad, especially in Europe." - but it is possible that the FOMC will start to reduce their asset purchases later this year.