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Fed’s Williams confirms “multi-step” plan for tapering

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Fed’s Williams confirms “multi-step” plan for tapering

The United States Federal Reserve will likely initiate a gradual, “multi-step” plan for bond tapering sometime this year, according to Fed Bank of San Francisco President John Williams. As one of the main backers of record stimulus, Williams said he was on board with Fed Chairman Ben Bernanke’s timeline for a 2013 bond tapering. Speaking to reporters at the annual National Association for Business Economics meeting, the regional Fed president told reporters the central bank already has a framework in place to reduce its record stimulus bill.

Speculation about the pace and timing of a Federal Reserve bond taper has made headlines since the spring, when Ben Bernanke first hinted at the possibility. Two-thirds of economists surveyed by Bloomberg believe an initial tapering will commence shortly after the September FOMC policy meetings. However, recent employment data have given the central bank more to think about before it begins to unwind the third iteration of its quantitative easing program.

While unemployment dropped last month to its lowest level in nearly five years, the decline was just as attributable to labour force contraction as it was to job growth. The US economy added 169,000 jobs in August, but the labour force participation rate—the proportion of working age people holding a job or looking for one—is at a 35-year low. Although the unemployment rate is inching closer to the Fed’s 7 percent target, it’s declining for the wrong reasons, which poses a significant challenge for policymakers. Fed policymakers have said that insofar as inflation remains below target, they won’t consider raising interest rates until unemployment falls to 6.5 percent.

The Fed’s Williams expects the unwinding of stimulus to end sometime next year. He believes the unemployment threshold of 6.5 percent won’t be reached until 2015, making an interest rate hike unlikely before that time. There are three remaining FOMC policy meetings scheduled this year: September, October and December.

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