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One Fed dove ready to end easy money

San Francisco Fed president says 2014 will be last of funny money bond buying

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John Williams, president of the San Francisco Federal Reserve, told Lambda Alpha International and Arizona Bankers Association that he supports the decision by the Federal Open Market Committee to start tapering its policy of printing money to buy bonds, and that he expects an end to the easy-money policy by the end of 2014.

The Fed announced in December that it would start easing back from its $85 billion a month bond-buying, cut the monthly pace of Treasury and mortgage purchases by $10 billion to $75 billion on an optimistic economic forecast.

"We will likely continue to reduce the pace of those purchases, and eventually eliminate them, over this year," he said. Williams said it was a straightforward decision, even though he was a supporter of the money printing that added $4 trillion in debt to the balance books.

"With the economy having improved so much and the future looking brighter, it was time to start taking our foot off the accelerator and ease up on the monetary stimulus," he said.

William is seen as closely aligned with incoming Fed Chair Janet Yellen, who was also president of the San Francisco Federal Reserve after her time as an economist at the University of California at Berkley.

"Scaling back on asset purchases is not a retreat from accommodative monetary policy. The federal funds rate will remain near zero for the foreseeable future,” he assured bankers.

On the housing market Williams said he foresees continued recovery even if the pace slows in 2014.

"This improvement has been propelled by several forces. First, the Fed’s very accommodative monetary policy supported historically low mortgage rates. Second, housing prices had seen a steep decline—and the cost of a new home is still much lower than at the market’s peak. Third, as the labor market improves, household incomes are rising," William pointed out.

"That is, with low mortgage rates, cheaper houses and more money in Americans’ bank accounts, housing is affordable again and the market has seen a reversal. Sales and prices are up substantially. In fact, prices on existing homes have risen at double-digit rates nationwide over the past year. They are now up by about 20 percent from the lows reached in 2011."

This improvement in home prices and sales has created a “virtuous cycle,” he asserted.

“The rebound in the market has helped to reduce foreclosures, which are almost back to pre-crash levels. Fewer foreclosures means fewer distressed sales—which means fewer houses being sold at drastically reduced prices. Fewer distressed sales means less supply and fewer sellers willing to take a loss—which strengthens prices further. As prices strengthen and the market looks up, builders see the increase in demand, which bolsters new home construction. That, of course, boosts businesses in related industries—like building materials, home furnishings and appliances—and creates jobs, lots of jobs,” Williams said.

He did have a few words of warning, though. Housing prices and supply haven’t fully rebounded in line with market fundamentals.

"First, there are important differences between circumstances now and what we saw leading into the crisis. Lending standards and financial oversight are much stricter, for one. For another, recent price increases have in large part reversed an overreaction in the market during the housing crash. That is, house prices don’t look that out of line with fundamentals overall," Williams noted.

“In addition, prices may be affected by the limited numbers of homes currently for sale. It looks as though owners have been holding off putting their houses up for sale, waiting for the market to strengthen even further. That would mean there are plenty of houses ready and waiting on the sidelines. I expect to see more of these houses come back on the market, and the resulting increase in supply should help temper upward pressure on prices."

He also said he thinks the housing market is far from seeing a true boom in construction.

"Mortgage rates rose last year, which dampened sales, slowing momentum in house prices. And while there’s been a sizable increase in housing construction, it’s still low by historical standards,” Williams said. "To put numbers to that: It looks like about 600,000-plus single-family homes were started in 2013, based on the data through November. The longer-term annual average is about 1 million per year. So, we are nowhere near “boom” levels of housing construction."

The full text of Williams’ remarks can be read here.

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