Lockhart Says Fed ‘Not Out of Bullets,’ Could Purchase Assets

Atlanta Fed President Dennis Lockhart
Federal Reserve Bank of Atlanta President Dennis Lockhart. Photographer: Price Chambers/Bloomberg

Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank could purchase more Treasuries or alter its balance sheet if the U.S. economy were to slow further.

“If additional actions are required, I can assure you the Federal Reserve is not out of bullets,” Lockhart said today in a speech in Florence, Alabama. “Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view. These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory.”

U.S. central bankers last week for the first time specified a date for their commitment to low borrowing costs, saying the benchmark rate will stay in a range of zero to 0.25 percent at least through mid-2013. They had previously pledged to keep rates low for an “extended period.”

The Federal Open Market Committee lowered its economic assessment, saying it now “expects a somewhat slower pace of recovery over the coming quarters.” It left the door open for more action, saying it discussed “the range of policy tools available to promote a stronger economic recovery.”

“I’m currently cautious about further monetary action,” Lockhart said in remarks prepared for a speech to the Rotary Club of Florence. “I still maintain that a resumption of growth is the most likely case. But if that assessment proves to be wrong, I believe we do have tools to address whatever circumstances arise.”

Asset Size, Composition

Lockhart said while the FOMC hasn’t been explicit about how long it would maintain a balance sheet near record in size, “it makes sense to me that policies related to the overall size and composition of assets on the balance sheet should align with explicit rate policies.”

The Atlanta Fed official also said the central bank has “ample tools” to deal with any liquidity problems that emerge in financial markets.

The risk of a recession has risen to 30 percent this month from 14 percent in July, according to the median of the 39 economists who responded to a Bloomberg News survey released Aug. 12. Growth will average a 2.3 percent annual rate in the second half of the year, about a percentage point less than projected last month, the survey found.

Gross domestic product, adjusted for inflation, cooled to a 1.6 percent rate in the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a slump has followed within a year, according to data since World War II used in an April study by Jeremy Nalewaik, a Fed board staff economist.

Growth Forecast

“At the Atlanta Fed, we have revised down our near and intermediate gross domestic product growth forecast, but we are holding to the view that the economy will continue to grow at a very modest pace,” Lockhart said. “In other words, we do not expect the onset of outright contraction -- a recession -- but I have to say the risk of recession is higher than we perceived a month or two ago.”

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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