New San Francisco Fed chief downplays inflation threat, sees price pressures easing

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The Federal Reserve’s new top official in the West, in his first public speech, defended the central bank’s policy course and said that fears of serious inflation erupting from Fed stimulus programs were unrealistic.

John Williams, who was named president of the San Francisco Fed bank March 1, told a Town Hall Los Angeles forum Wednesday that he expected current inflation pressures to recede and that the Fed had an “unwavering commitment to price stability.”

He also said that he expected the U.S. economy to rebound in the current quarter from its weak first-quarter pace, and that the pace of growth should “build further strength” in 2011 and 2012. But if it doesn’t, he signaled that he could be willing to support additional stimulus measures.

Williams’ comments showed he is closely aligned with the views of Fed Chairman Ben S. Bernanke rather than with so-called hawks on the central bank’s board who fear that the Fed has gone too far in trying to bolster the economy.

Williams, 48, had been executive vice president and research director of the San Francisco Fed since 2009. He replaced Janet Yellen in the top post at the Fed branch, which oversees the agency’s operations in nine Western states. Yellen became vice chairwoman of the Fed’s board of governors in Washington.

Some Fed critics say its easy-money policies are boosting inflation pressures, including by encouraging speculation in commodities such as crude oil.

The Fed has kept short-term interest rates near zero for more than two years, and in November committed to buying a total of $600 billion of Treasury bonds in an effort to hold down longer-term interest rates. The bond-buying program, the second one the Fed has launched since 2008, is scheduled to end June 30.

Williams, who has a doctorate in economics from Stanford University, acknowledged there has been a “very substantial pickup in prices for many energy, food and industrial commodities.” But he rejected the idea that the Fed’s monetary policy is responsible for anything more than a “small portion” of the gains.

Instead, like Bernanke, Williams blamed the jump in commodities on “the rapid rebound in the global economy in the past year and a half, led by robust growth in emerging market economies.” . . .

But he said there were more signs lately that commodity price gains were running out of steam, which he said should help to deflate inflation pressures in the second half of the year. Repeating another Fed theme, Williams said that anemic growth in wages (stemming from still-high unemployment) was a major barrier to a 1970s-style inflation spiral developing this time around. Asked after his speech whether he would support the idea of additional Fed stimulus for the economy, Williams left the door open.

“It depends on where we are in terms of the recovery, in terms of employment and unemployment, where we are in terms of the inflation picture,” he said. “I don’t prejudge whether we would need or not need” to do more.

Williams will become a voting member of the Fed’s policymaking committee in January. Voting slots rotate among the 12 regional Fed presidents.

Directors of the regional banks elect their presidents, subject to approval by the Fed’s board of governors in Washington.

-- Tom Petruno

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