The U.S. economy is recovering too slowly for consumers and businesses to regain confidence and spend more freely, San Francisco Federal Reserve Research Director John Williams said.
Williams, seen as a possible candidate to replace Janet Yellen as president of the San Francisco Fed, said the Fed's recent announcement of further monetary easing through bond purchases was aimed at addressing these anemic conditions.
"In many respects, it feels like we're still mired in recession," he said in prepared remarks before the Seattle Community Development Roundtable.
The Fed earlier this month said it would buy an additional $600 billion in Treasury bonds in an effort to push long-term interest rates lower and spur lending.
"So far, the responses in financial markets show that this program is working," he said.
Williams said that with inflation running so low in the United States, the country remains at risk of Japanese-style deflation. He added that despite some differences, the recent U.S. outlook was frighteningly similar to the situation experience by Japan in the early 1990s as the country entered what became known as its lost decade.
"The Fed would like to kick the recovery into a higher gear and nudge inflation up a bit, avoiding further disinflation," he said.
Yellen was recently appointed vice chair of the Fed's Washington-based board.
INFLATION NOT A CONCERN
The U.S. economy expanded at a modest 2 percent clip in the third quarter and unemployment has held around 9.6 percent for several months.
During the recession, the worst in more than 70 years, the Fed slashed rates effectively to zero and purchased some $1.7 trillion in government and mortgage-backed securities.
Downplaying the notion that the Fed's ultra-easy monetary stance would eventually spark a bout of high inflation, Williams argued the economy was still operating too far below its capacity for this to happen.
"There are no signs of the sort of overheated economic activity that triggers inflation," he said.
If those signals ever emerge, the U.S. central bank has the tools — "and the will" — to tighten policy as needed, Williams said.
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