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 "The rebounding sectors are the interest-sensitive ones," San
Francisco Federal Reserve Bank President John Williams said in a
speech to students at the University of Seattle that otherwise
contained little about the outlook for the economy or monetary
policy.
Buyers borrow money to finance purchases of cars and houses, the
reasoning goes, so lowering borrowing costs will affect those
industries first and most.
The fact that auto sales are nearly back to their pre-crisis levels,
and housing sales have much improved, are evidence that the Fed's
efforts to push down borrowing costs are working, Williams said. The
Fed has kept short-term rates near zero for more than five years and
bought trillions of dollars of Treasuries and mortgage-backed
securities to encourage people and businesses to spend and invest.
Williams, who was a key economic advisor to Janet Yellen when she
ran the San Francisco Fed, has been a vocal supporter of the Fed's
super-easy monetary policies. But he has also been ahead of many of
his colleagues at the Fed in calling for the central bank to wind
down its massive bond-buying program.
The Fed began that process this past December, and plans to end its
bond-buying, now at $65 billion a month, before the end of this
year. Williams has said he expects the Fed to begin to raise rates
by the middle of next year.
Most of Williams' prepared remarks on Wednesday were meant to
educate students about the basics of Fed policy. In one surprise,
Williams, who has a doctorate in economics from Stanford University,
suggested that the market reaction to the Fed's unexpected policy
announcement in September was only what economists would have
predicted.
In June, bond yields rose and stock prices tanked after then Fed
Chair Ben Bernanke expressed optimism about the economic recovery
and said the Fed would likely begin reducing its bond-buying program
later in the year. The rout later became known as the "taper
tantrum" to mark the fierce and, to the Fed, unwelcome drop in
stocks and rise in borrowing costs.
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"Investors had clearly been expecting tapering to occur much later,"
Williams said.
In September, when investors were resigned to the idea that the Fed
would start those reductions soon, bond yields fell and stock prices
surged when the Fed unexpectedly kept its bond-buying program
intact.
"Because they expected us to begin the taper, market participants
saw not changing anything as essentially an easing of monetary
policy," Williams said. "This is a great example of economic theory
playing out in practice exactly as it's supposed to."
Notably, Williams did not say that neither he nor his Fed
colleagues, many of whom are also economists, had not anticipated
that the market would react the way it did to Bernanke's comments in
June.
(Reporting by Ann Saphir; editing by
Lisa Shumaker)
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