“The situation we find ourselves in today is like driving a car up a long, steep hill,” Williams said. “As the road gets flatter — as the factors holding back the recovery wane — we’ll need to lighten up on the accelerator a bit.”
Williams offered one of the most concrete timetables for the Fed’s program so far. But he is not a voting member of the central bank’s policymaking committee, and others have been more cautious about predicting when the Fed will withdraw its stimulus.
The Fed is buying $85 billion in government and mortgage-backed securities every month in an effort to tamp down long-term interest rates and stimulate demand. It has said it will keep buying bonds until the labor market improves substantially.
Though Fed officials have different opinions on what that improvement should look like, they seem to be coming to an agreement that the economy is close to reaching it. The real estate market is heating up again, boosting home prices and creating construction jobs. Consumer spending has remained strong despite higher taxes this year. And the private sector has been creating jobs at a steady pace in the face of government spending cuts.
That has led several officials to begin publicly discussing the possibility of reducing the amount of the Fed’s bond purchases. At a news conference last month, Fed Chairman Ben S. Bernanke
emphasized the central bank’s ability to calibrate its purchases — a program known as quantitative easing — to economic conditions. On Tuesday, Chicago Fed President Charles Evans said he believes this year will be a turning point for the recovery.
“At some point we will reduce this flow rate and end this program,” he told reporters. “We would have to look at the data and see how this is playing out.”
Still, officials have been careful to acknowledge that the economy is not out of the woods — and that the Fed will not act until it is. The government is slated to release its monthly report on the job market Friday, providing an important clue about the impact of federal spending cuts on the recovery. Fed Governor Daniel Tarullo said Wednesday on CNBC that he is looking for “healthy peaks” in job creation as evidence that the recent economic momentum is sustainable before he will consider scaling back bond purchases.
The Fed is “trying to create some more traction for the economy on the road to maximum employment,” he said.
Since launching its bond-buying program in 2008, the Fed has tripled its balance sheet. That has alarmed critics who say the purchases amount to meddling in the marketplace and could lead to broad financial instability over time. Some Fed officials have cited those risks in a push to end the program.
“I see the nuances of us exiting as challenging,” Richmond Fed President Jeffrey Lacker told reporters Tuesday evening.
But if the Fed halts its purchases, it probably will be because it believes its efforts have paid off rather than concern over unintended consequences.
“We want to be careful not to overstimulate the economy,” Williams said Wednesday. “Thus, we’ll need to dial down our monetary stimulus as the economy continues to improve.”
Williams stressed that such a move would not signal a tightening of monetary policy; the Fed could continue for the foreseeable future to hold on to the securities it has already purchased. Bernanke has said it might never sell them, opting instead to let them mature.
But Williams said he needs more information before making any decision.
“An important rule in both forecasting and policymaking is not to overreact to what may turn out to be just a blip in the data,” he said.