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Fed’s Lockhart Backs Policy, Would Tighten to Curb Prices

Federal Reserve Bank of Atlanta President Dennis Lockhart
Federal Reserve Bank of Atlanta President Dennis Lockhart. Photographer: Chris Rank/Bloomberg

Federal Reserve Bank of Atlanta President Dennis Lockhart said that while the Fed’s current monetary policy is appropriate to bring about a moderate expansion and stable prices, he is ready to tighten policy if recent higher inflation persists.

“I am prepared to support a change of policy if evidence accumulates that the low and stable inflation objective is at risk,” Lockhart said today in a speech in Fort Myers, Florida. “For now, however, I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy and supportive of both the employment and price stability objectives.”

The Fed’s policy committee said March 15 that the U.S. economic recovery “is on a firmer footing,” while the labor market is “improving gradually.” Policy makers reiterated plans to complete purchases of $600 billion in U.S. Treasuries by June to accelerate the recovery.

“While short-term measures of inflation have moved up rather strongly in the last few months, I hold to the view that this trajectory will not persist,” Lockhart said. “I continue to see the Federal Reserve’s inflation objective I just outlined as attainable.”

The Atlanta Fed president told reporters after his speech he favors completing the asset purchases as scheduled and opposes additional moves based on his current economic forecast.

“Where I stand today is I favor playing it out as originally designed and originally communicated,” Lockhart said. “The bar is high to have another significant quantitative easing, or large-scale asset purchase program, given the outlook that I have. If something changes in the outlook, as I said, I have to consider in either direction a change in policy.”

Rise Is Transitory

Lockhart said he is monitoring closely inflation and inflation expectations for signs that higher inflation could continue.

“The rise in prices we have seen is transitory and it will settle out at a rate consistent with our objective, that is around 2 percent of broad inflation,” he said in response to an audience question.

The consumer-price index increased 0.5 percent in February, the most since June 2009, according to figures from the Labor Department. Overall consumer prices increased 2.1 percent in the 12 months ended February, compared with a 1.6 percent year-over-year gain the prior month.

Lockhart repeated that his “base case” is for a moderate recovery while adding that higher energy prices could dampen consumer spending and global uncertainty was a risk restraining business plans.

“I come to a net positive outlook for the economy for the rest of 2011 and 2012,” Lockhart said at the Bonita/Estero Market Pulse Conference. “Notwithstanding headwinds and risks, a self-reinforcing virtuous circle of final demand is increasingly becoming established.”

The most likely forecast is a “continuation of the storyline of moderate growth, gradually declining unemployment, and the settling of price movements around an inflation rate that is consistent with the Federal Reserve’s price stability objective,” he said.

Lockhart told reporters after his speech that a sustained rise in energy prices was a risk to his growth outlook.

“If for example there is a spike in oil prices and that is sustained for a period of time, our analysis is that could have a dampening effect on growth,” he said.

Decline in Sales

The U.S. economy is forecast to expand at a 3.4 percent rate this quarter and 3.3 percent rate in the second quarter, according to the median of 67 economists surveyed by Bloomberg News this month. A decline in new home sales and durable goods orders in February, reported this week, suggest the recovery continues to be uneven.

The central bank was divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the $600 billion of Treasury purchases. Philadelphia Fed President Charles Plosser, Richmond Fed President Jeffrey Lacker and St. Louis’s James Bullard have urged a review of the purchases in light of a strengthening economy and concern over future inflation.

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.

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