Fed district chief expects central bank's stimulus cuts to continue

WASHINGTON — Brutal winter weather contributed to a downturn in job growth and other economic data, raising questions about the strength of the recovery and testing the Federal Reserve's resolve in unwinding its key bond-buying stimulus program.

Fed policymakers will have another month of data to consider when they next meet in mid-March. But if the views of John C. Williams are any indication, the Fed is likely to hold course.


As president of the Federal Reserve Bank of San Francisco, one of the Fed's 12 district banks, Williams has a seat at the mahogany table where top Fed officials meet regularly to discuss the economy and make policy decisions.

At the mid-March meeting, Janet L. Yellen, who this month succeeded Ben S. Bernanke as the leader of the world's most influential central bank, will be navigating some familiar challenges — an economic recovery that has hit a soft patch and a Fed committee that doesn't always see eye to eye.

Williams, a Sacramento native with a doctorate in economics from Stanford, isn't a voting member of the policymaking committee this year, but like all the district presidents, he participates in the meetings and weighs in on policy options.

In an interview with The Times, Williams spoke about his views on the economy's latest slowdown, the declining unemployment rate and its usefulness for Fed policymaking, the Fed under Yellen, and the prospect for earnings of American workers to grow. Here are excerpts:

The last two monthly employment reports were considerably softer than expected. Some saw them as signaling a slowdown in the recovery. What's your take?

It's true that December and January numbers were weaker. Nevertheless, we still saw job gains in both of those months, job gains that were probably sufficient to have continued improvement in the labor market.

In the big picture, I don't see any of the data we've seen recently as being that different from our underlying view that we're seeing continued good, positive momentum in the economy and continued job growth.

Would another jobs report next month like January's payroll growth of 113,000 be enough for you or the committee to put a hold on the so-called tapering of the Fed's bond-buying stimulus?

If there was another employment report similar to what we saw in January, I personally would not see that as being inconsistent with my view of the economic recovery. I wouldn't call for a change in tapering.

The nation's unemployment rate has fallen faster than expected, to 6.6% last month, but many don't think it's capturing the real condition of the labor market. Do you think it's still the single best indicator of employment?

A proper description of labor market conditions would take into account, for example, the unusual number of people who left the labor force even though they would like to work. So there are some aspects of the unemployment rate that may be understating to some extent the number of people who are unemployed.

Similarly, the number of people working part-time who want full-time hours aren't counted as unemployed. That's a very significant number of people.

On the other side of the coin, other indicators including job vacancies and perception of companies on how hard it is to fill an opening actually indicate that the labor market is as strong as or even stronger than the unemployment rate indicates.

I do think, though, the unemployment rate today and the improvement in unemployment does provide a very good single indicator.

Changing the Fed's benchmark short-term interest rate, now near zero, is tied to the unemployment rate hitting 6.5%. But with the rate already at 6.6%, do you see the Fed dropping that threshold or making other changes in its so-called forward guidance?

Now that the unemployment rate has come down to being close to 6.5%, the formulation we put into place some time ago is past its shelf life.

We put in that 6.5% threshold for a reason. We were trying to provide a very clear signal that we were going to keep accommodation and interest rates low for a very long time. That worked, that succeeded in its mission.

My own view is that it would be good to revamp that description as opposed to putting in a new threshold. We should refine that language in a more qualitative nature, explaining what are the factors, including inflation, labor market and growth, that will go into the decision to raise interest rates.

As the economy picks up, more workers who left the labor force were expected to come back. They haven't, yet. When will they, or are they out for good?

About half of the decline in the labor force participation since 2007 is simply the baby boom retirement. You don't want to lose track of that; about half of that is purely demographic.

The puzzle is the other half. Some of this is people who have given up but do want to come back. This typically has a lag. After the economy starts to pick up and the economy has gotten stronger, it takes time for them to come back into the labor market and be employed.

I think the answer from the research is that it's going to take another year or two. Now, it's an open question on how many of those there are.

A significant part of the decline [in labor force participation] is people going into disability. Some people are in two-earner households where one has a job. As unemployment gets down to the low 6's, the hypothesis of whether these people are coming back will be tested.

The average worker's earnings have been stagnant for years. When will people start to see some meaningful gains?

Wage and salary growth has been about 2% the last couple years, and I think that reflects mostly the fact that we've had a severe recession and a gradual recovery.

As the labor market continues to improve, we're going to start seeing more cases where labor markets are starting to tighten up, and we are starting to hear about that.

And that's going to start putting some pressure on wages, especially in those skills and professions where there's a short supply.

Do you see business investment and the productivity gains in the future?

Business investment has been one of the missing ingredients of the recovery. Given the economic growth, given the stock market and interest rates, it is striking how muted business investment has been.

As the economy gains more traction and gets stronger, it's a pretty reasonable case that business investment, both for plant and equipment and software but also on the commercial side, could rebound pretty strongly, which would imply increases in productivity.

In her congressional testimony this week, Yellen emphasized continuity. What are you expecting to see from a Yellen-led Fed?

She's been a very key player in developing the policies over the past few years and a strong supporter of our policies. I wouldn't expect changes in terms of the framework we're using or the approach we're taking on monetary policy.

In terms of her individual leadership traits, again there's going to be aspects of continuity. Ben Bernanke really emphasized the importance of transparency, open dialogue and debate, really a kind of academic-style of let's try to get to the best answer however we can. And I see those same traits that Janet has.

If anything, Janet is more seminar-like in her behavior, likes to have the debate right in front of her and making sure she's heard it all. She always impressed me that she cares deeply about the process of getting to the right decision in a way more important than whether you got every decision right.


What is the biggest difference inside the committee?


I think the one issue that is relevant today that is completely reasonable to disagree and debate are the unconventional policies, such as the use of forward guidance and asset purchases: What are the costs and benefits in terms of economic goals and risks to financial stability or other unintended consequences?

There's a variety of views, there's a lot of uncertainty, we don't have perfect information on how all this works. The asset purchases have been a kind of a powerful tool to affect markets, but at the same time it's been a very blunt tool, kind of going off in directions that at least I didn't understand.

The Fed's San Francisco district covers nine states. What divergence, if any, are you seeing within the district or from the rest of the nation?

There's no question in terms of unemployment rates or other metrics of the economy that the nine states have all been improving over the last couple years.

You do see kind of two parts of the 12th District. What you see is parts of California like the Bay Area, places like Seattle, some parts of Southern California, definitely in Utah and in Idaho, where parts of these areas have not only recovered but are booming again.

A few pockets especially in the Central Valley here, California, Arizona and Nevada still are deep in the hole from the housing crash and the foreclosure crisis and all the aftereffects from that. What I worry about is definitely Nevada and parts of Central Valley and Inland Empire, clearly [they] are really still struggling with unemployment and jobs.

What's your biggest concern about the economy?

I think the fundamentals are good. My big concern has been the mischief created in Washington, D.C., the last couple years around government shutdown, brinkmanship, debt ceiling debates and all of that.

[Those issues] not only had a first-order effect on economic growth and jobs through government cutbacks and shutdown, but also there's pretty strong evidence that [they] created a huge amount of uncertainty among regular Americans, businesspeople, and a hunkering down and pulling back from willingness to take on investments and spend money.

I know this year looks better, but I still worry about that. It could pop up again and again [and] provide a pretty significant damper on confidence and growth.