By Steven K. Beckner

(MNI) – Emphasizing the “flexibility” of the Federal Reserve’s

third round of large-scale asset purchases, San Francisco Federal

Reserve Bank President John Williams said Friday that the Fed “may

expand” its asset purchases to “include other assets.”

Williams, a voting member of the Fed’s policymaking Federal Open

Market Committee, said that alternatively the Fed could adjust downward

or even end its third round of asset purchases if it finds they aren’t

working or are causing problems.

However, he strongly suggested that the FOMC will more likely need

to continue so-called “quantitative easing,” given that the Fed is

“falling short” on both its maximum employment and price stability

objectives.

And he said high unemployment has to be the Fed’s “central focus”

for now, although he emphasized that he is not taking low inflation for

granted.

Williams voted with the majority on Sept. 13 to Buy $40 billion per

month of mortgage backed securities until the labor market improves

“substantially” — on top of the $45 billion in longer term Treasury

securities it plans to buy through year-end.

The FOMC also delayed short-term rate hikes until at least mid-2015

and said it “expects that a highly accommodative stance of monetary

policy will remain appropriate for a considerable time after the

economic recovery strengthens.” .

Williams said those policies are helping the housing market and

other aspects of the economy and said they should help increase the

economy’s growth rate to 2.5% next year and 3.5% in 2014.

Speaking to community leaders in Salt Lake City, Utah, Williams

said QE3 “is intended to be flexible and adjust to changing

circumstances.”

“Unlike our past asset purchase programs, this one doesn’t have a

preset expiration date,” he said in prepared remarks. “Instead, its

duration will depend on what happens with the economy.”

Echoing the FOMC statement that it will continue buying MBS “until

the job market shows substantial improvement,” Williams added that “we

may expand our purchases to include other assets.”

“But, if we find that our policies aren’t doing what they’re

supposed to do or are causing significant economic problems, we’ll

adjust or end them,” he said.

Referring to the FOMC’s unprecedented pledge to keep the funds rate

very low “for a considerable time” even after the recovery strengthens,

Williams said that means “we intend to keep short-term rates low even as

the economy improves to make sure this recovery takes hold.”

While stressing the Fed’s continued commitment to price stability,

Williams said, “the unemployment rate has remained far above the maximum

employment level for over four years straight. Thus, unemployment

is-and should be-a central focus of monetary policy right now.”

“This concentration on getting unemployment down in no way

represents a lessening of the importance of price stability,” he

continued. “Quite the opposite. Consider that, if the recovery loses

steam, inflation could fall too low-well below our 2% goal.”

Calling inflation fears unwarranted, Williams noted that “inflation

has averaged only 1.7% over the past year, below this 2 percent target.”

“This means we’re falling short of both of our goals, especially

the maximum employment mandate,” he said.

“What’s more, the recovery faces threats from Europe and the fiscal

cliff,” he went on. “This is a situation that demands Fed action to keep

our economy on track towards maximum employment and price stability.”

Aside from European and fiscal headwinds, Williams said business

contacts are telling him that uncertainty about the policy outlook is

having a “tremendous” effect on economic activity.

** MNI **

–email: sbeckner@mni-news.com

[TOPICS: MMUFE$,M$U$$$,M$$BR$,MFU$$$,MGU$$$]