Fed’s Lockhart Says Sustained Job Gains Reduce Need for Easing
Federal Reserve Bank of Atlanta President Dennis Lockhart said the biggest U.S. employment gains in six years will probably be sustained, reducing the need for additional central bank easing.
“I would have to see some pretty severe circumstances before I endorse for another round of quantitative easing,” Lockhart said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “The outlook is positive enough that I am not sure I see the need for it.”
The Federal Open Market Committee is holding off on increasing monetary accommodation unless the expansion falters or prices rise at a rate slower than its 2 percent target.
Minutes of the March 13 meeting by policy makers show decreased urgency to add stimulus. At a January meeting, a few members said that economic conditions “could warrant the initiation of additional securities purchases before long.” In March, no sentiment was voiced for more easing without worsening economic conditions.
Chairman Ben S. Bernanke said last week that while a recent decline in the jobless rate is encouraging, continued accommodative policy will be needed to make further progress. The FOMC this year has said subdued inflation and economic slack will probably warrant exceptionally low rates through at least late 2014. Policy makers upgraded their economic outlook at the March meeting after improvements in the job market.
While “one school of thought” is that employment gains simply reflect a temporary reversal of too-severe cuts in the past recession, “I am still inclined to believe we are going to see continuing improvement on the employment front, and that the pace of job growth we have seen for the past several months is not transitory,” Lockhart said following the broadcast part of the interview. “That is part of the reason why I am comfortable with policy as it stands today.”
A third round of asset purchases, or quantitative easing, might be appropriate if the U.S. economy falters or concern mounts that prices will fall, Lockhart said. Those conditions don’t exist now, he said.
Lockhart said if longer-term Treasury yields rose enough to effectively be a “tightening” in policy he may be more open to modest steps toward easier policy. Such measures may include a “sterilized” quantitative easing, asset purchases designed to minimize inflation risk, or additional Operation Twist, purchase of long-term bonds with proceeds from sales of short-term securities.
“I make a distinction between policies that are balance sheet neutral and those that would expand the balance sheet” such as asset purchases alone, Lockhart said. “I am not ready to say the conditions exist now that would call for those. I think they are options that are available to us if we see a total tightening picture” with yields rising further.
Improving Labor Market
The yield on the 10-year U.S. Treasury note has risen to 2.29 percent from 1.80 percent on Jan. 31 in response to reports of an accelerating economy and improving labor market. About 1.2 million jobs were created in the past six months, the most since the same period ended May 2006, Labor Department figures show. The unemployment rate held in February at a three-year-low of 8.3 percent.
Lockhart said he evaluates additional easing by looking at possible benefits versus its costs. Today, more asset purchases may not help the economy because they may not result in additional economic activity. Such a result could raise public concern about inflation and make the Fed’s eventual exit plan more challenging, he said.
The rise in yields so far is “not a huge concern in my mind,” Lockhart said. “Mostly what you have seen as longer rates have risen a bit is a better outlook for the economy.”
U.S. growth will probably be 2.5 percent to 3 percent this year, and “2013 should be some improvement over 2012,” Lockhart said.
“Inflation is in an acceptable range and is going to hew to the 2 percent target sufficiently closely to not make it a major policy concern at the moment,” he said.
Orders to U.S. factories climbed 1.3 percent in February, the third increase in the past four months, boosted by demand for business equipment, Commerce Department figures showed today. Gains in manufacturing, rising consumer confidence and an improving job market have helped to boost the economic outlook this year.
“I am more confident that the economy is gaining traction,” Lockhart said in the radio interview. “I think this economy has more strength and better legs, but at the same time one has to be a little bit cautious.”
Lockhart said the Fed’s pledge to keep rates low through late 2014 “is very much dependent on the outlook” though currently “aligns with the outlook I see.”
“I am not concerned about a double dip recession at least organically,” Lockhart said. “We have an economy growing at a moderate pace.” Still, the European debt crisis and oil prices are risks to the pace of recovery, he said.
Fed officials have expressed a full range of views on the need for more easing. Additional stimulus may not be warranted with the economy strengthening, St. Louis Fed President James Bullard said March 23. Richmond Fed President Jeffrey Lacker voiced the same view on March 30.
While economic reports have improved, it is “far too soon to conclude that we are out of the woods” and “nothing has been decided” on more bond purchases, New York Fed President William C. Dudley said March 19. Chicago Fed President Charles Evans said March 22 that “clearly, more accommodation would be appropriate” with unemployment too high.
The U.S. economy expanded at a 3 percent annual rate in the fourth quarter, the fastest pace in more than a year, as households spent more freely, the government reported. Growth will probably slow to 2 percent this quarter, according to the median of 72 economists’ forecasts in a Bloomberg News survey from March 9 to March 13.
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