Lockhart Says Fed Should Take Time in Removing Stimulus as Recovery Modest

Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank should take its time in withdrawing economic stimulus amid moderate growth and a quickening of inflation that will probably prove temporary.

“My view of the future permits a degree of patience as regards monetary policy,” Lockhart said today in the text of a speech in Knoxville, Tennessee. “There is still a halting and fragile quality to the economy. I think the process of restoration of full economic strength with higher employment continues to require support.”

Policy makers, while noting a stronger economy and voicing concern over inflation, differed over whether to begin removing record stimulus this year after completing $600 billion in purchases of U.S. Treasuries through June, according to minutes of their March 15 meeting.

The European Central Bank yesterday lifted interest rates for the first time in almost three years to curb inflation. Fed Chairman Ben S. Bernanke said April 4 at an Atlanta Fed conference that he expects higher commodity prices to create a “transitory” boost in inflation and that the central bank would act if the increase were lasting.

Lockhart echoed that assessment, calling inflation from commodities prices “transitory” and “muted” to the Knoxville Economics Forum. He described inflation expectations of the public for the long term as “stable.”

“Roughly two-thirds of consumer spending is on services, which are not materials-intensive,” Lockhart said. “To the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited” by competitive pressures and higher productivity.

Strengthening Labor Market

Fed officials will update their economic forecasts at their April 26-27 meeting amid a strengthening labor market. The U.S. economy added 216,000 workers last month, more than forecast, and the unemployment rate unexpectedly declined to a two-year low of 8.8 percent, figures from the Labor Department showed April 1.

“Although the economy may have lost some momentum at the start of the year, and notwithstanding the factors exerting a drag on growth, I still expect a continuing moderate pace of expansion,” Lockhart said. “This moderate growth will gradually bring down the level of unemployment.”

Inflation will probably “level off around a rate consistent with the Fed’s price stability mandate,” he said.

The central bank’s policy committee said March 15 that the U.S. economic recovery “is on a firmer footing,” while the labor market is “improving gradually.”

Lockhart spent much of his speech discussing a “relatively strong rebound” in manufacturing. The Institute for Supply Management’s manufacturing index was little changed at 61.2 in March, after February’s 61.4 reading that was the highest since May 2004, the Tempe, Arizona-based group reported April 1.

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

To contact the reporters on this story: Steve Matthews in West Palm Beach, Florida, at 1310 or smatthews@bloomberg.net

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

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