Why John Williams says monetary tightening won’t happen right away


Nov. 26 2019, Updated 1:18 p.m. ET

The San Francisco Fed’s John Williams spoke on the economic recovery, the normalization of monetary policy, and the Fed funds rate 

“Now, thankfully, the extraordinary is turning back into the ordinary, and we are starting down a path towards normalization, both for the economy and monetary policy,” said Dr. John Williams, president of the San Francisco Fed, speaking at a presentation on Thursday, May 22. In his speech, Williams discussed the normalization of monetary policy and monetary tightening. Mentioning that the economic outlook for the U.S. was “quite good,” Williams said the Fed’s monetary policy would slowly revert to normal as the economic recovery progresses.

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In his speech, Williams also made an important point: monetary tightening (an increase in the Fed funds rate) is distinct from the normalization of monetary policy. “The taper does not reflect a tightening of monetary policy. We’re not putting out the fire, we’re just gradually adding less and less fuel. It’s just one small step towards policy normalization, when the economy has sufficient heat on its own. A real tightening of policy—which would mean raising the fed funds rate—is still a good way off,” he said. The Fed is widely expected to raise the Fed funds rate sometime between Q2 and Q4 2015.

Williams was speaking at a presentation to the Association of Trade and Forfaiting in the Americas in San Francisco. The topic for the presentation was “The Economic Recovery and Monetary Policy: The Road Back to Ordinary.” In this series, we’ll discuss Williams’ views on the economic recovery and the Fed’s monetary policy and how they affect fixed income (BND) and equity (OEF) ETFs.

About Dr. John Williams

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Dr. John Williams has been the president and chief executive officer of the Federal Reserve Bank of San Francisco since March 1, 2011. In this role, he serves on the Federal Open Market Committee (or FOMC), bringing the Fed’s Twelfth District’s perspective to monetary policy discussions in Washington. Williams is also the managing editor of the International Journal of Central Banking.

The San Francisco Fed’s district (or the 12th Federal Reserve District) is the largest by geography and economy among the 12 Federal Reserve Bank districts. The 12th Federal Reserve District includes the nine western states of Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington—plus American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands (Source: FRB of San Francisco).

About the Association of Trade & Forfaiting in the Americas Inc.

The Association of Trade & Forfaiting in the Americas Inc. (or ATFA) is a leading non-profit organization of trade finance professionals that promotes informational exchange regarding the best practices of global trade finance in the Americas. ATFA currently boasts over 90 members, comprising banks, hedge funds, insurance companies, law firms, and various corporations actively involved in trade finance (Source: AFTA).

Normalization of the Fed’s balance sheet and an accommodative monetary policy will have a significant impact on fixed income ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), the iShares 20+ Year Treasury Bond (TLT), and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). We’ll discuss their impact in the following parts of this series.

In the next part of this series, we’ll discuss Williams’ take on why the economic outlook merits a return to monetary policy normalization.


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