Fed’s Lockhart Says He Would Oppose Monetizing Debt

Federal Reserve Bank of Atlanta President Dennis Lockhart said he would oppose any attempt to persuade the Fed to monetize the growing federal debt.

“I have no intention of supporting, under political pressure, the monetizing of the debt,” Lockhart said today in a speech in Atlanta. That would be “a central banker’s cardinal sin.”

The U.S. budget deficit will widen this year to $1.5 trillion, the Congressional Budget Office said in a report Jan. 26. The projected shortfall, up from last year’s $1.3 trillion, is set to increase, in part, because of the $858 billion tax-cut measure passed by Congress, the nonpartisan agency said.

In his State of the Union address last month, President Barack Obama proposed a five-year freeze in non-security-related discretionary government spending, which represents about 14 percent of the budget. Republicans say that doesn’t go far enough and are demanding big spending cuts as part of any deal to raise the nation’s $14.3 trillion debt ceiling, which is likely to be reached within months.

Lockhart called for a “bipartisan, credible long-term plan to stabilize the deficit.” He spoke as part of a panel discussion sponsored by the Consulate General of Switzerland in Atlanta.

The U.S. economy’s long-term trend rate of growth is about 2.5 percent to 3 percent, and growth “far north of 3 percent” is necessary to bring down the U.S. fiscal deficit over time, Lockhart said in response to audience questions.

The U.S. government will have discipline imposed on it by capital markets if it fails to address the growing federal debt, he said.

“When you are moving on the issue, the capital markets will be somewhat patient,” he said. “It is a matter of getting things moving in the right direction.”

Lockhart, 64, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy with Lockhart next voting in 2012.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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