Federal Reserve Bank of San Francisco President John Williams, emphasizing the need for policy flexibility, said any move to reduce the pace of the central bank’s bond buying could be followed by an increase should the economy weaken again.
“Even if we do adjust downward our purchases, it doesn’t mean we’re now in some autopilot of moving in the same direction,” Williams, 50, said in an interview yesterday in San Francisco. “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back” if the economy weakened.
Fed officials are debating the economic conditions that could prompt them to start slowing their $85 billion in monthly purchases of Treasuries and housing debt. Chairman Ben S. Bernanke yesterday told lawmakers he wants to see “real and sustainable progress” on unemployment, and many Fed officials said more labor-market progress is needed before starting to taper the program, according to minutes of their last meeting.
“We can adjust it down some, watch how things progress from there, and then adjust it again one way or the other,” Williams, who doesn’t vote on monetary policy this year, said at the San Francisco Fed. A slowing or end of the purchases also “doesn’t mean we’re going to start tightening policy anytime soon,” he said.
Stocks and Treasuries dropped yesterday after Bernanke, responding to a question from Representative Kevin Brady, a Texas Republican, said the flow of purchases could be reduced “in the next few meetings” if the Fed is confident gains in the economy are durable. In his testimony to the Joint Economic Committee, Bernanke also warned that a premature end to stimulus would endanger the recovery.
The Standard & Poor’s 500 Index slid 0.8 percent yesterday and the benchmark 10-year Treasury yield jumped 11 basis points to 2.04 percent. Stocks extended their losses in today’s trading, with the S&P 500 down 0.4 percent to 1,649.07 as of 1:08 p.m. in New York. The 10-year note yielded 2.03 percent.
Williams’s remarks yesterday underscore policy makers’ caution as they seek ways to eventually end an unprecedented expansion of their balance sheet without undercutting their commitment to support the recovery.