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Fed's Williams: Policies have aided growth without undue fallout

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled "U.S. Ove
John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled "U.S. Ove

By Ann Saphir

IRVINE, California (Reuters) - The U.S. Federal Reserve's unconventional monetary policies have lowered borrowing costs and boosted growth without creating unwanted inflation, a top Fed official said on Monday, predicting the Fed's latest round of asset-buying will exceed $600 billion.

The Fed will want to see sustained jobs gains and a consistent drop in the unemployment rate before it stops buying assets, making it likely the purchases will continue until "well into next year," John Williams, president of the San Francisco Federal Reserve Bank, told reporters after a lecture at the University of California, Irvine.

The U.S. central bank's prior round of quantitative easing totaled $600 billion; its first one was about $1.7 trillion.

The Fed began its third round of quantitative easing, known as QE3, in September, beginning with $40 billion a month in mortgage-backed securities and promising to continue or expand the purchases if the labor market does not improve substantially.

Although asset-buying and other non-traditional monetary policies pose potential risks, "the available evidence suggests they have been effective in stimulating growth without creating an undesirable rise in inflation," Williams said at the lecture. "We are not seeing signs of rising inflation on the horizon."

The policies also have not stimulated excessive risk-taking, he said.

The Fed lowered short-term interest rates to zero in December 2008, and has bought more than $2 trillion in long-term securities to lower borrowing costs even more.

August 2011 it moved further into unconventional territory by saying it planned to keep rates ultra-low for about two more years, a form of policy easing known as forward guidance.

In September, the Fed launched a third round of asset purchases and promised to keep rates low until at least mid-2015.

The latest asset purchase program kicked off with an initial $40 billion a month in mortgage-backed securities, and the Fed said it will continue or expand the program until the jobs situation improves substantially.

Unemployment was 7.9 percent last month, considerably higher than the 5 percent to 6 percent that most economists see as the norm for the U.S. economy. Inflation has averaged below the Fed's 2 percent target over the past year.

Williams told the largely student audience that the Fed's first two rounds of asset-buying likely shaved 1.5 percentage points from the unemployment rate. They also probably kept the U.S. economy from falling into deflation, he said.

Forward guidance has also become a key monetary policy tool, he said. The Fed's first stab at it, in August 2011 when it promised low rates until mid-2013, pushed down borrowing costs sharply, equivalent to cutting short-term interest rates by 3/4 to 1 percentage point, he said.

Such guidance only works if the public believes the central bank will do what it says, he added.

"If the public doesn't understand the central bank's intended policy path, then forward guidance may not work so well," he said.

One way for the central bank to reinforce public expectations is to buy assets on a large scale, effectively "putting its money where its mouth is," he said. Buying assets shows the Fed is "determined to ease monetary conditions," he said - and helps push down rates further.

Quantifying the effects of the Fed's policies is difficult, he added, but "the presence of uncertainty does not mean that we shouldn't be using these tools."

Williams has been a strong supporter of the U.S. central bank's super-easy monetary policy and is a voter this year on the Fed's policy-setting committee.

Once it comes time to exit its super-easy monetary policy, the Fed will target a "soft landing," raising rates and then selling the assets it has accumulated in its bid to push borrowing costs lower, Williams said.

(Reporting by Ann Saphir; Editing by Leslie Adler and Lisa Shumaker)

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