Lockhart Sees Fed Continuing to Purchase Bonds Beyond Mid-2013
Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank will probably keep up its bond-buying program past mid-2013 to achieve sustained improvement in the labor market.
“It is probably going to be a struggle to see by mid- year” enough progress in the jobs outlook to warrant stopping, Lockhart said, speaking in an interview with Matthew Winkler, editor-in-chief of Bloomberg News, in New York yesterday at the Bloomberg Global Markets Summit hosted by Bloomberg Link.
While the world’s largest economy will probably expand by about 2 percent this year, resolution of U.S. fiscal challenges may spur deferred business spending and fuel better-than- forecast growth, Lockhart said. He predicted that Congress will agree to raise the nation’s statutory borrowing limit “because it has to.”
Lockhart backed the Federal Open Market Committee decision in December to add $45 billion in purchases of Treasury notes each month to $40 billion in monthly buying of mortgage bonds. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to $2.97 trillion to stoke growth and reduce 7.8 percent unemployment. They are debating whether to continue stimulus this year or stop adding to it.
Minneapolis Fed President Narayana Kocherlakota said this week the Fed should ease more to boost hiring, while Boston Fed President Eric Rosengren said bond-buying could be expanded if necessary. Charles Plosser of Philadelphia and Jeffrey Lacker of Richmond have voiced doubts about the effectiveness of bond purchases and warned of inflation risks.
Lockhart said yesterday the “bond purchasing will need to continue longer into the year,” and “whether it goes beyond that” will depend on the costs and efficacy of the program.
The minutes from last month’s meeting show a divide among FOMC participants on how long the purchases should last. Participants who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.
The Atlanta Fed chief said the U.S. is in a “2 percent world in terms of growth,” with inflation also below the central bank’s target of 2 percent. FOMC participants expect 2.3 percent to 3 percent growth this year, according to forecasts released after their Dec. 11-12 meeting.
“I have not yet seen a strong indication that we need to adjust that story,” said Lockhart, who doesn’t vote on policy this year and predicted this week the U.S. economy will expand 2 percent to 2.5 percent during 2013. He said he doesn’t see a source for faster economic growth in 2013.
Stocks rallied as U.S. housing starts jumped and jobless claims fell more than forecast, bolstering optimism in the world’s largest economy. The Standard & Poor’s 500 Index gained 0.6 percent to 1,480.94 in New York. Yields on 10-year Treasuries rose six basis points, or 0.06 percentage point, to 1.88 percent.
The economy has the potential to outperform expectations, depending on how lawmakers resolve U.S. fiscal challenges, Lockhart said.
Most chief executive officers “are really in neutral territory, watching very carefully how things evolve,” he said. “There could very well be an upside scenario in 2013 based on deferred spending that has built up” that “could be unleashed by fiscal authorities” reaching agreements.
Policy makers at their last meeting saw concerns about the so-called fiscal cliff restraining growth. While a deal was struck in time to avert some tax increases slated to take effect Jan. 1, automatic spending cuts were forestalled by two months and their fate remains unresolved as the U.S. again nears its statutory borrowing limit.
“At the end of the day, the debt ceiling will be raised -- because it has to,” Lockhart said. “What concerns me,” is “simply how much of a spectacle does that turn out to be and does it undermine confidence?”
The economy picked up across much of the country last month, boosted by auto and home sales, even as the outlook for unemployment showed few signs of improvement, the Fed said Jan. 16 in its Beige Book business survey.
“Economic activity has expanded since the previous Beige Book report, with all 12 districts characterizing the pace of growth as either modest or moderate,” according to the survey, which is based on reports from the 12 Fed district banks.
Chairman Ben S. Bernanke indicated this week he’ll closely scrutinize the potential costs of asset purchases.
“So far, we think we are getting some effect, it is kind of early,” Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. “We are going to continue to assess how effective” the program is “because it is possible that as you move through time and the situation changes that the impact of these tools could vary.”
Lockhart, who has never dissented from an FOMC decision, said he sees a “legitimate concern” in the central bank’s ballooning balance sheet.
“Over a long period of time, you would have to be concerned” about having too large positions that would affect markets in those securities, Lockhart said. “That is a long- term prospect but not something to ignore.”
Lockhart said that as the Fed’s balance sheet grows, it also poses greater challenges for the central bank’s eventual withdrawal of stimulus.
“I’m very comfortable that when the time comes,” the exit “can be carried out in an orderly way,” Lockhart said. Still, “the bigger the balance sheet, the more the unknown factor.”
The Fed last month linked its interest-rate outlook to economic thresholds, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5 percent and if inflation isn’t projected to go beyond 2.5 percent one or two years in the future.
The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson authorized the Treasury to issue long-term securities to help finance entry into World War I. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. never has defaulted on its obligations.
The last time Congress fought over raising the ceiling, Obama signed an increase on Aug. 2, 2011, the day that Treasury warned U.S. borrowing authority would expire. Standard & Poor’s cut the nation’s credit rating.
Still, U.S. Treasury bond investors -- who most directly bear the risk of any government default -- haven’t shown alarm over political fights ultimately resolved in Washington. Yields on 10-year U.S. Treasury notes declined to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade, and continued to fall.
Yields on 10-year Treasuries, a benchmark for everything from mortgages to corporate borrowing costs, are down from more than 5 percent in 2007, before the financial crisis of 2008.
Inflation rose 1.5 percent in November from a year earlier, according to the personal consumption expenditures index, excluding food and energy. The broader consumer price index increased 1.7 percent in 2012, according to the Labor Department.
A former banker, Lockhart spent much of his career at Citigroup Inc. and Heller Financial Inc. before becoming a professor at Georgetown University. He has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.
The southeast U.S. has been slow to recover from the recession that ended in 2009 because of weakness in housing markets until the past year. Florida posted the nation’s highest state foreclosure rate in 2012 and Georgia was fourth, according to RealtyTrac Inc., a mortgage-data firm.
Georgia has led the U.S. in failures of banks since the fourth quarter of 2007, with 85 collapses, followed by Florida, according to Trepp LLC, a real estate and banking data provider.
Lockhart’s district is home to the tourism industry in Orlando and New Orleans, auto manufacturing from Georgia to Mississippi, and public companies such as Coca-Cola Co., Home Depot Inc. (HD), United Parcel Service Inc. and Delta Air Lines Inc.
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