“Strong countercurrents” including a decline in wealth, tight credit and concern about financial markets are impeding growth, Williams said today at a forum in Santiago. “Fiscal policy actions that reduce uncertainty and stimulate recovery are badly needed” and should “work in tandem with monetary policy,” he said.
Fed officials are increasingly calling on other parts of government to help lower unemployment that Williams forecasts will remain above acceptable levels until 2016. He cited as an example a recent U.S. government program to let more homeowners refinance mortgages, which could lower foreclosures and give a “modest boost” to consumption.
Dallas Fed President Richard Fisher said more monetary stimulus would be ineffective because businesses have held back from hiring because they are concerned about the direction of fiscal policy, the tax system and regulations such as the overhaul of health-care system.
Businesses are “in a defensive crouch,” Fisher said today in a speech in Dallas, criticizing both Democrats and Republicans for sending the country “into a ditch.”
“We need to completely reboot our fiscal policy,” he said.
For its part, the Fed’s actions have been “very aggressive,” Williams said. “These policies have been effective at improving financial conditions in important ways, but they are swimming against strong countercurrents that impede recovery,” Williams said.
“Other actions that address the continuing problems in the housing market could help spur recovery and enhance the effectiveness of monetary policy as well,” Williams said at a meeting hosted by Chile’s central bank.
The central bank lowered its main interest rate almost to zero in 2008 and has since bought $2.3 trillion of Treasuries and government-backed housing debt aimed at reducing borrowing costs. The Fed in August and September also used conventional tools to lower borrowing costs and is considering more steps. Fisher was one of three officials to dissent from those two actions.
New York Fed President William C. Dudley said in a speech yesterday that “it would be greatly beneficial if the administration and Congress could more effectively work together to craft a coherent fiscal policy.” Fed Chairman Ben S. Bernanke said Nov. 10 that the central bank “was never intended to shoulder the entire burden of promoting economic prosperity.”
Williams, 49, an economist who took office in March after serving as the bank’s research director, said Nov. 15 that the Fed may need to conduct more asset purchases in the face of stubborn unemployment, moderate growth and undesirably low inflation. He will have a vote on the policy-setting Federal Open Market Committee throughout 2012.
Today, Williams said “three powerful currents” have slowed U.S. growth. The first, a “massive destruction of wealth” in housing and stock prices has resulted in higher saving and about a 4.5 percent “sustained reduction in consumer spending,” he said.
Seeking a Loan
Lenders have “tightened credit standards sharply” for people seeking a home loan amid millions of foreclosures that bring “massive deadweight costs to society” and make it difficult to judge financial companies’ liabilities and prospects for housing prices, Williams said.
In addition, “uncertainty” in financial markets is causing investors to seek low-risk havens in U.S. government debt and the highest-rated private securities, Williams said.
The Chicago Board Options Exchange Volatility Index, a benchmark measure of stock volatility known as the VIX, is at “very high levels,” he said. The market for packaging commercial real-estate loans into securities “has largely been dormant” and is “frozen” for non-government-backed home mortgages, Williams said.
The Standard & Poor’s 500 Index was little changed at 1,215.65 in New York at the close of trading. The yield on the 10-year Treasury note increased four basis points to 2 percent. A basis point is 0.01 percentage point.
“The tumultuous events of the financial crisis, the household debt overhang and the U.S. and European fiscal crises have sapped confidence and diminished people’s willingness to take on risk,” Williams said.