SF Fed Williams wants more QE

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San Fran Fed President Williams gave an interesting speech overnight. He sounds like he wants more QE to me – though he didn’t call for it immediately.

The guts of his view is that the NAIRU may be higher just now, but that this is a temporary thing, and that it’ll fall as the economy recovers. More easing now would not only help demand, it’d also help the supply side of the economy.

That’s a fair argument – there is lots of research that suggests that time out of the labour market causes loss of human capital. I count Williams as a voter for more QE if NFP is weak again tonight (my guess is 120k — the market is looking for 160k).

I conclude that mismatches and other labor market inefficiencies have raised the natural unemployment rate from about 5 percent before the recession to between 6 to 6½ percent today.6 Most of these factors should recede over the next few years. The effects of the temporary extension of unemployment insurance benefits will fade. And mismatches should diminish as workers retrain, and construction and other hard-hit industries recover. Once these adjustments have occurred, I expect the natural rate of unemployment to settle at 5½ percent

The important point is that today’s unemployment rate is about 2 percentage points above my estimate of the natural rate. That is, the elevated rate of unemployment is primarily due to a shortage of demand, not to structural changes in the labor market.


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