Federal Reserve Bank of Atlanta President Dennis Lockhart said it’s too early to consider an exit from record stimulus, a process that’s likely to begin only when the recovery becomes “more clearly sustainable.”
“Even if they are a bit premature in my view, questions are already arising about the specifics of the Fed’s exit strategy,” Lockhart said today in a speech in Atlanta. He said a change in the Fed’s public statements “would actually start the process” of tightening.
Lockhart has backed the Federal Open Market Committee’s plans to complete a $600 billion Treasury-securities purchase program by June aimed at boosting the recovery. Fed Chairman Ben S. Bernanke and other policy makers last month reduced their forecasts for U.S. growth this year after the economy slowed in the first quarter, while increasing estimates for inflation excluding food and energy prices.
The Atlanta Fed chief told reporters after his speech that the start of an exit could be triggered by a “clearly sustainable” expansion, including “healthy growth” in output matching his forecast and “continued evidence that employment is coming back.”
In his speech, Lockhart said the public’s expectations for future inflation are “reasonably stable.”
Lockhart said that an increase in the inflation rate may subside as prices of oil and other commodities moderate. The consumer price index rose 3.2 percent in April from a year earlier, the biggest increase since October 2008. The index excluding food and energy rose 1.3 percent, the most since February 2010.
“I anticipate that over the next two years, inflation will converge to the Fed’s de facto inflation objective of 2 percent or a bit less,” Lockhart said to the Media Financial Management Association conference in Atlanta. “Prices of many commodities, including oil, have either leveled off or declined recently. Many analysts have begun to speculate that this softening in commodity prices might be reflected in consumer prices later this year.”
Lockhart echoed Bernanke, who said last month he expects inflation resulting from higher commodities prices to be “transitory.”
“I do believe what we have seen is temporary,” Lockhart told reporters, describing the consumer-price index as “elevated and they reflect commodity prices.”
The yield on the Treasury 10-year note last week fell to 3.13 percent, the lowest level this year, which Lockhart said reflects investors’ perceptions that inflation is transitory.
“The markets seem to be accepting the view that inflation has not risen to a level that will be persistent for the longer term,” he said.
Lockhart told reporters he agreed with Bernanke that Congress should raise the ceiling on government debt to avoid roiling financial markets, while also working on a credible plan to reduce the deficit and debt.
While Philadelphia Fed President Charles Plosser has laid out an exit strategy, Lockhart said he was wary of talking in too much detail.
“Talking about doing will actually start the process of doing,” he said in his prepared remarks. He cited an Aug. 27 speech by Bernanke about the potential need to purchase additional long-term securities. While the program to buy $600 billion in Treasuries wasn’t announced until Nov. 3, “markets began to price in this move” after the speech.
First Exit Step
“I think a similar approach might be used for exit,” he said. “In other words, the first step toward implementation of an exit strategy could start with communication, recognizing that what the FOMC says has real economic impact.”
At the same time, Lockhart indicated that recent comments by Fed policy makers about possible steps toward an exit shouldn’t be read as a signal that a move is imminent.
“It would be a mistake to assume that these public conversations on exit are much more than an open discussion of the options the central bank should consider.”
Lockhart repeated his view that growth will likely pick up later this year to a pace of 3 percent to 4 percent after a first-quarter slowdown and maintain that pace for the next couple of years.
“I expect growth of consumer and business spending to be sustained, reflecting increased confidence in the durability of the recovery,” he said. “Robust economic growth of some of our major trading partners should boost exports. The manufacturing sector is likely to contribute significantly to growth, as domestic and foreign demand for U.S.-made goods increases.”
The economy grew at a 1.8 percent pace in the first quarter of 2011, according to Commerce Department data. Growth will pick up to 3.3 percent in the current quarter and will average 2.7 percent for the year, according to the median of 67 economists surveyed this month by Bloomberg News.
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.