SF Fed Director of Research Doesn't Understand Monetary Economics

During a speech in Portland, Oregon, John Williams, the San Francisco Federal Reserve’s executive vice president and director of research said:

“..monetary policy remains highly supportive of recovery” and “interest rates are extraordinarily low.”

This is clearly an indication that Williams doesn't know what is going on around him.

It doesn't matter how low rates in general are, IF THE RATE PAID BY THE FED ON EXCESS RESERVES exceeds other rates, banks are, in general, going to keep huge amounts of funds on deposit with the Federal Reserve as excess reserves. This  is why over there is a trillion dollars in excess reserves not in the system.

Thus from Williams' perspective that monetary policy should be "supportive", he is absolutely clueless. He is really talking about a trillion dollars that is not in the system, just sitting on the sidelines as excess reserves.But to him this is somehow a "highly supportive" monetary policy.

On unemployment, Williams said:

Unemployment will come down with agonizing slowness.I expect unemployment to end 2010 at about its current level of 9 1/2%. Once growth picks up to a more robust pace, the unemployment rate should gradually decline, but only to about 8 1/2% by the end of next year.

How forecasters come up with these mechanistic forecasts on such things as unemployment is a mystery. If the Fed did lower the interest on excess reserves so that banks pumped that money into the system, the unemployment rate would drop dramatically because of the inflationary boost in wage rates it would cause.

Here again, though, Williams doesn't understand what the Fed is actually doing and the role of  Big government in the mess. With slowed money growth (a good thing, it is causing a a readjustment in the structure of the economy away from the sectors that benefit from manipulated money pumping.), this unemployment would be over quickly, if the Fed did not pay people not to work via unemployment payments. The one further hitch in the current environment is that the economy is becoming extremely over-regulated, which makes it very difficult for firms to make new hires, not knowing the cost of the new hires, e.g., not knowing what the healthcare expense of a new hires will be. But there is nothing that has to be "agonizing" about a drop in the unemployment rate, if the government switched from policies that promote unemployment.