Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

A step in the right direction:

Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

Fri Nov 18 14:04:45 2011 EST

–The Federal Reserve’s actions have not been enough to deliver a robust recovery

–The recovery has been hurt by the decline in housing and stock prices, tightening of credit and uncertainty in Europe

–Fiscal policy actions to reduce uncertainty and stimulate recovery are ‘badly needed’

By Anusha Shrivastava

NEW YORK-(Dow Jones) — The Federal Reserve’s actions during the past four years have not been enough to deliver a robust recovery so fiscal policy actions are “badly needed”, said a central bank official on Friday.

“What would be especially helpful at this juncture are fiscal policy actions that work in tandem with monetary policy to stimulate the economy,” said John Williams, president of the Federal Reserve Bank of San Francisco, speaking at the Central Bank of Chile in Santiago.

Williams, who expects the U.S. unemployment rate to remain above 7% for three more years, named three “powerful currents” slowing the pace of recovery.

There has been a “massive destruction of wealth” because of the financial crisis, stemming from a housing collapse, he said.

Second, there’s been a severe tightening of credit because of the decline in residential property prices and the wave of foreclosures.

The heightened uncertainty in Europe and overall health of its financial system is another contributory factor diminishing the appetite for risk such that investors are fleeing to safe assets like U.S. Treasurys, he added.

Given the weakness in the economy and the uncertainty impeding recovery, Williams called for fiscal policy actions that work with monetary policy to boost the economy.

One example of such a policy is the recently announced U.S. government initiative to make it easier for homeowners whose houses are now of lower value than when they bought them, to take advantage of very low rates and refinance their mortgages.

“This will trim monthly payments for some households and could reduce foreclosure rates,” Williams said. “It could also eventually provide a modest boost to consumer spending.”