Fed’s Lockhart Won’t Rule Out Any Monetary Policy Option

Federal Reserve Bank of Atlanta President Dennis Lockhart said the Fed should be ready to consider more monetary easing even while it can’t be expected to eliminate some of the forces impeding economic growth.

“Given the weak data we’ve seen recently and considering the rising concern about chronic slow growth or worse, I don’t think any policy option can be ruled out at the moment,” Lockhart said today a speech in Lafayette, Louisiana. “However, it is important that monetary policy not be seen as a panacea.”

Chairman Ben S. Bernanke said last week the central bank has additional stimulus tools, while not providing details or committing to deploying them. Policy makers will extend a meeting next month to two days to “allow a fuller discussion” of the economy and the Fed’s possible response, he said in a speech at a conference at Jackson Hole, Wyoming.

The Federal Open Market Committee at its Sept. 20-21 meeting will assess a U.S. economy that grew at a 1 percent annual rate from April through June, down from a 1.3 percent prior estimate, revised Commerce Department figures showed last week in Washington. Growth from January until June was weaker than any other six-month period since the recovery began in mid-2009.

Policy Adjustments

“We may find, as economic circumstances evolve, that policy adjustments are required,” Lockhart said to the Greater Lafayette Chamber of Commerce. “In more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy, especially considering the tensions policy must navigate between the short term” and longer structural adjustments.

Lockhart said in response to audience questions that the central bank should have a significant impact through its pledge to hold interest rates low through at least mid-2013, while the commitment may change should the economy gain strength.

The central bank’s pledge “should have a big influence on the market,” Lockhart said. “Even that is conditional to an extent” and “could be revisited,” he said. “For the most part, we can count on it.”

Lockhart said to reporters after the speech that he doesn’t now favor new monetary policy easing.

“Let’s get a bit more data,” he said. “I just think we should not yet fully jump to conclusions. We need to give the situation more time.”

The Standard & Poor’s 500 stock index rose 0.1 percent to 1,213.67 at 3:31 p.m. in New York, while yields on 10-year Treasuries increased five basis points to 2.226 percent, according to Bloomberg Bond Trader prices.

New Round

The Atlanta Fed leader also told reporters that a third round of bond purchases by the Fed, or quantitative easing, may not be the best treatment for the economy now. Signs of a recession or “deflationary pressures” would be needed for the approval of more asset purchases, he said.

The Atlanta Fed chief said he was “a bit cautious” about an idea of using the unemployment rate as a guide for when the Fed should tighten policy. Such an approach may suggest the central bank is targeting an employment level, even though job growth hinges on factors other than monetary policy.

The Atlanta Fed has revised down its growth forecasts for this year and next, Lockhart said. Reduction of debt by consumers and businesses, financial system repair and fiscal policy changes are inhibiting the recovery, he said.

“Temporary factors, such as spiking commodity prices and supply chain disruptions related to Japan’s natural disaster, held back economic activity earlier this year,” he said. “But the slowdown cannot be explained by those factors alone” and the “downside risks to growth have risen notably.”

Officials Divided

Fed officials are split on whether to do more. Chicago Fed President Charles Evans said yesterday in a CNBC interview “I would favor more accommodation.” He also called for specifying “markers” for unemployment and inflation that would be needed to raise interest rates from near zero.

Any new easing could face more opposition from some Fed presidents. Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against the August statement that pledged to keep interest rates near zero at least until mid-2013. The last time three voters dissented was on Nov. 17, 1992, under Bernanke’s predecessor, Alan Greenspan.

Job Growth

Disappointing job growth is limiting consumer spending, which accounts for 70 percent of output growth, the Atlanta Fed official said.

“Higher cost of living and the weak labor market are likely to have discouraged consumers from increasing expenditures,” he said. “The consumer spending numbers for July were a bit higher than expectations, but still not at a level that would make for a robust recovery.”

Payrolls climbed by 70,000 workers in August after a 117,000 increase in July, and the unemployment rate held at 9.1 percent, according to the median forecast of economists surveyed by Bloomberg News before Labor Department data Sept. 2.

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. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.


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