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The Fed’s Williams Discusses QE Uncertainties

“Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a Fed decision, said critics of the central bank including Nobel Prize-winning economist Paul Krugman disregard how bond buying by the Fed is an untested tool with an ambiguous impact.

“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” Williams said in a paper posted Tuesday on the San Francisco Fed’s website. “Nothing could be further from the truth.”

The 29-page paper by Williams is an academic response to critics such as Krugman who have said high unemployment and low inflation show the Fed hasn’t done enough to fuel economic growth. The central bank is currently considering reducing its $85 billion in monthly bond purchases even with unemployment at 7.6 percent and the Fed’s preferred inflation index showing prices rising 1 percent from a year earlier, below the central bank’s 2 percent goal.

“Policymakers are unsure of the future course of the economy and uncertain about the effects of their policy actions,” Williams said. “Uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed’s balance sheet to influence financial and economic conditions.”

Williams cited Krugman, a Princeton University economist, by name in his paper. Krugman didn’t immediately respond to a request for comment in a phone message and an e-mail.

Moderation ‘Defense’

Williams, who titled his paper “A Defense of Moderation in Monetary Policy,” told reporters on June 28 that he supported the timetable for winding down purchases that Fed Chairman Ben S. Bernanke outlined in his June 19 press conference. Bernanke said the Fed could start shrinking the pace of purchases later this year and end them around mid-2014 if the economy performs in line with the central bank’s forecast….”

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