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Fed's Williams sees rates staying low; says fresh guidance needed

Wednesday, 19 Feb 2014 | 7:00 PM ET

NEW YORK, Feb 19 (Reuters) - A top U.S. central banker said on Wednesday he expects interest rates to stay near zero until "well into next year," adding that the Federal Reserve will soon need to modify its verbal promise to keep monetary policy so easy for a while to come.

The comments by John Williams, president of the San Francisco Fed, add to a growing number of policymakers who have called for an adjustment to the forward guidance, including a return to more qualitative guidance.

Williams, in remarks prepared for delivery to the Money Marketeers of New York University, said he wants the U.S. central bank to qualitatively stress how it will react to economic developments as the Fed re-writes its language on what would cause it to raise rates in the future.

Turning to the Fed's $65 billion in monthly bond purchases, also designed to stimulate the economy, Williams said the measured reductions to this program are not "locked in," though the central bank will not easily shelve its plan to wind down the program.

Williams's remarks were also fairly upbeat on the U.S. economic recovery, which he said paved the way for the Fed to adjust its guidance on where it sees interest rates headed.

"Our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions," he said.

"This is best done by trying to explain how we are likely to react to economic developments, rather than putting down specific, quantitative markers for future policy decisions."

As it stands, the Fed has said it expects to keep rates near zero until well after the unemployment rate, now at 6.6 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target.

U.S. inflation is now just above 1 percent.

"Let me stress that the normalization of monetary policy is likely to be a gradual process, and I expect the fed funds rate will stay near zero until well into next year," Williams said, adding the Fed should avoid "oversimplifying" its policy down to one or two economic indicators.

In response to better labor market data and a pick-up in economic growth, the Fed has now twice cut it monthly bond-buying by $10 billion. It has telegraphed that more such cuts are coming at future policy meetings and that it wants to halt the program by later this year.

"It is not locked in, but the bar for altering the path is high," said Williams, who does not have a vote on Fed policy this year.

(Reporting by Jonathan Spicer; Editing by Leslie Adler)