Fed's Williams: 'moderation' key when using unconventional tools
SAN FRANCISCO, July 9 (Reuters) - Uncertainty about how well the Federal Reserve's unconventional policy tools will work means using them more aggressively would not necessarily bring U.S. unemployment and inflation back to normal levels more quickly, a top Fed official said on Tuesday.
San Francisco Fed President John Williams argues in a paper stuffed with equations that timidity can be a virtue when it comes to using central bank tools, like bond-buying, whose effectiveness and risks are not as well known as more traditional policy levers like short-term interest rate targets.
"Uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed's balance sheet to influence financial and economic conditions," Williams said in a paper he will present at a Society for Computational Economics conference in Vancouver, Canada on Friday.
The San Francisco Fed released the text of the paper on Tuesday.
Just because inflation is forecast to under-run its target, and unemployment is forecast to stay elevated, is no cause to infer that a given course of monetary policy is sub-optimal, he said.
That was because when there is uncertainty about effects, there is a wide range of possible outcomes, some of which could mean the economy would veer widely from the central bank's goals.
"Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal,' Williams said.
The Fed is buying $85 billion in Treasuries and housing-backed securities each month to push down long-term borrowing costs in a bid to fuel economic growth and hiring.
The bond-buying, known as quantitative easing, is meant to add to monetary stimulus when short-term rates, which the Fed has kept near zero since December 2008, cannot be pushed any lower.
(Reporting by Ann Saphir; Editing by Leslie Gevirtz)