Federal Reserve Bank of Atlanta President Dennis Lockhart said slow improvement in the labor market warrants keeping the Fed’s target interest rate near zero through 2014, even as the economy shows signs of strengthening.
“I expect the economy to return to a better growth trajectory than what we saw in 2011,” Lockhart said today in a speech in Sarasota, Florida. “But I also foresee a slow and arduous return to full capacity, including full use of the nation’s human capital,” which “will simply take time.”
Lockhart, who votes on monetary policy this year, supported the Federal Open Market Committee’s pledge on Jan. 25 to keep the target interest rate exceptionally low at least through late 2014. The Fed also for the first time released policy makers’ forecasts for the timing of the first increase in the benchmark interest rate. The predictions ranged from this year to 2016.
Chairman Ben S. Bernanke said in a press conference after the FOMC meeting that the Fed is considering buying more bonds. The central bank has engaged in two rounds of asset purchases totaling $2.3 trillion to reduce unemployment. It also cut the main interest rate close to zero in December 2008.
“The recent economic news has been encouraging, but in my view we haven’t seen enough sustained improvement to be sure it will last,” Lockhart said in a speech to the Global Interdependence Center at New College of Florida. “The current policy stance is appropriate for an outlook of steady, moderate growth with gradual employment gains.”
Lockhart told reporters after his speech he may consider supporting additional purchases of securities if that proved necessary to support the expansion.
“I don’t rule out further accommodation,” he said. “At the moment, I prefer to see how the economy develops.”
Lockhart also said he was confident inflation would stay near the Fed’s target of about 2 percent.
“My conclusion at the moment is that inflation is in a healthy zone, close to our now formal target,” he said to reporters. “Inflation expectations of the public continue to be stable. Consequently, I am comfortable with where we are.”
Responding to audience questions, Lockhart said Fed policies aren’t targeted to influence particular asset prices or industry sectors, though they have sometimes supported debt or equity prices more generally.
Subject to Revision
In his speech, the Atlanta Fed leader said the 2014 pledge was subject to revision if the economic outlook changes. He also said the accommodative policy doesn’t compromise the Fed’s new explicit goal of holding inflation at 2 percent.
“At the moment, I favor a policy-making posture I’d call vigilant restraint,” Lockhart said. “I am prepared to be somewhat patient and watch how the situation develops.”
Lockhart said he is “pretty confident” in 2.5 percent to 3 percent growth for 2012 in the absence of shocks, which last year included higher oil prices, Japanese auto-supply disruptions and the European debt crisis.
The Atlanta Fed president told reporters after his speech that the outlook for oil prices remained a risk, and that there has been a correlation between U.S. recessions and oil-price shocks in recent decades.
Since the meeting, some economic reports have exceeded expectations, including a drop in the U.S. unemployment rate to 8.3 percent, the lowest since February 2009. Payrolls rose last month by 243,000, exceeding the most optimistic forecast in a Bloomberg News survey.
Fed policy makers forecast an unemployment rate of 8.2 percent to 8.5 percent at the end of 2012, and 7.4 percent to 8.1 percent late next year.
Sales at U.S. retailers rose less than forecast in January, reflecting an unexpected drop in purchases of automobiles. The 0.4 percent gain reported by the Commerce Department today in Washington was half the 0.8 percent rise median forecast of economists surveyed by Bloomberg News.
Purchases excluding car dealers climbed 0.7 percent, more than projected and the biggest gain since March.
Lockhart, 65, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy, with Lockhart voting this year. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.