SAN FRANCISCO (MarketWatch) — The Federal Reserve could expand its stimulus package to include assets other than mortgage-backed securities if the U.S. economy fails to respond to its latest effort to jump-start the economy.
Reuters The Federal Reserve building in Washington.
“Unlike our past asset-purchase programs, this one doesn’t have a preset expiration date,” said San Francisco Fed President John Williams at a speech at the City Club on Monday. “Instead, it is explicitly linked to what happens with the economy.”
At its monetary-policy meeting on Sept. 13, the U.S. central bank said it would buy $40 billion worth of mortgage-backed securities per month as part of a stimulus plan colloquially known as QE3 — for Round 3 of quantitative easing.
“We might even expand our purchases to include other assets,” he said.
While the Fed is limited to what it can hold on its books, it can increase purchases of U.S. Treasurys, mortgage-backed securities, and debt issued by agencies such as Freddie Mac and Fannie Mac, Williams said.
He also suggested that the Fed could extend Operation Twist beyond the end of the year, when it is due to expire, and continue buying longer-term Treasurys if the economic recovery does not make substantial progress.
There are measurable and significant impacts from Fed’s policies from QE1 and QE2 in the market, but economic growth is not strong enough and still has a long way to go, he said.
Meanwhile, unless Europe heads nearer a worst-case scenario — a wholesale breakup of the euro zone — Williams considers the domestic “fiscal cliff” scenario a bigger threat to the U.S. economy, he said. The fiscal cliff refers to the federal tax increases and spending cuts that set to go into effect under current legislation.
“I don’t expect all these tax hikes and spending cuts to take place as scheduled,” Williams allowed. “Still, there’s little doubt that a number of austerity measures will hit. I expect that to slow our economy’s forward progress.”
Williams projected U.S. gross domestic product to expand by about 1.75% this year, followed by an acceleration in growth to 2.5% in 2013 and 3.25% in 2014. The unemployment rate, he said, is likely to ease to 7.25% by the end of 2014, while inflation remains below the Fed’s target of 2% “for the next several years.”
