How long will QE3 last? Until the end of 2014, the president of the San Francisco Federal Reserve Bank has said.
It will take more than a few months to reduce the unemployment rate, he says.
The FED will buy $40 billion of mortgage bonds each month. It wil, also buy $45 billion in Treasury bonds each month. It will sell shorter-term bills and bonds to offset these purchases. This will continue until the end of 2012. But this will probably continue beyond 2012.
How will this produce jobs? By pushing down borrowing costs, which will make it cheaper to produce new cars.
In short, it will produce a bubble. He did not mention the word “bubble.”
He thinks the unemployment rate will fall to 7.25% by the end of 2014.
I see. It’s 8.2% today. So, in a mere two years, it will be down to 7.25. All this will take is a half a trillion in mortgage bond purchases per year, plus T-bond purchases and T-bill sales.
I would not call this good news. But he says the FED would regard this as a “substantially” improved job market.
Short-term interest rates, now near zero, will likely stay until at least mid-2015, he said, echoing the Fed’s own policy statement.
But the Fed would need to start raising interest rates “well before” unemployment reaches a level that the economy can sustain without generating inflationary pressure. That level is currently probably around 6 percent and over the long run is around 5.5 percent, he said.
Williams’ view contrasts with that of fellow policymaker Narayana Kocherlakota, the head of the Minneapolis Fed, who last week called for the central bank to keep rates low until unemployment falls to 5.5 percent, as long as inflation does not threaten to breach 2.25 percent.
Then he made this prediction. Economic growth will be at 3.25% per year at the end of 2014. The CPI will be rising at 2%.
He called QE3 open-ended.
With an open-ended bond-purchase program, he explained, the Fed can ramp up purchases and even expand into purchases of other assets if progress on jobs is too slow. It can also slow down or stop purchases if progress is faster than expected.
My conclusion: the FED will play this by ear. It has a blank check. It will write lots of checks.