Federal Reserve Bank of Atlanta President Dennis Lockhart said policy makers need to retain the option of starting a new round of bond buying to spur the U.S. expansion as it faces risks from the weak economies of Europe.
“As popular as it might be in some quarters to rule out” a third round of so-called quantitative easing, “I do not think this option can be taken off the table,” Lockhart said today in Tokyo. “QE3 will work under the right circumstances. But I don’t believe such circumstances prevail at this time.”
Several Fed policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their April meeting showed last week. Chairman Ben S. Bernanke on April 25 said he was prepared to take more steps to aid the economy, even as he signaled he didn’t see such a necessity at that time.
The Federal Open Market Committee on April 25 reiterated its expectation that subdued inflation and economic slack will probably warrant keeping the benchmark interest rate close to zero at least through late 2014.
Operation Twist, a program to lower borrowing costs through the purchase of long-term Treasuries and the sale of short-term debt, will likely end on schedule in June, Lockhart said in response to questions following his speech.
‘Harm the Recovery’
“My own view is that it will probably not be necessary to extend it, although it is one of the options that we have if we wanted,” he said. “So a condition that might precipitate the use of that tool would be rapidly rising longer term interest rates that we feel would harm the recovery through the channel of home mortgages for example.”
Lockhart said a new quantitative easing program might be warranted “if there is a severe deterioration in the U.S. economy as evidenced by rising unemployment that is the result of real job loss as opposed to simply rising participation.”
U.S. shares rose today with the Standard & Poor’s 500 Index climbing 1.2 percent to 1,310.19 at 11:00 a.m. in New York. The U.S. 10-year Treasury yield rose to 1.74 percent from 1.72 percent.
Risks to the U.S. economy are “tilted modestly to the downside,” partly because of “recession or very weak growth along with serious fiscal and banking strains in Europe,” Lockhart said.
At the same time, Lockhart said he sees limits to the effectiveness of monetary policy. The Fed can’t address economic problems that might result from factors beyond its purview like tax policy or inadequate training for workers, he said.
“Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the FOMC’s official target of 2 percent,” Lockhart said. “Those efforts for the time being should fall in the realm of communications.”
The Atlanta Fed president said the central bank should “clarify its strategy for the medium and long term” so that businesses and consumers have a more specific understanding of the policy outlook and can evaluate what could change it. While Lockhart didn’t mention a specific proposal, one option under consideration is a regular monetary policy report, St. Louis Fed President James Bullard told reporters last week.
Fed presidents rotate voting on monetary policy, with Lockhart voting this year.
“Current economic data continue to be a mix of positives and negatives,” Lockhart said. “Consumer activity is continuing to grow, and manufacturing is expanding. At the same time, we’ve seen a recent slowdown in business investment, and the pace of job creation has weakened.”
Lockhart said he expects “only modest growth over the next few years” with inflation at around the central bank’s 2 percent target “over the forecast horizon.”
Payrolls climbed by 115,000 workers in April, the smallest increase in six months, Labor Department figures showed. The jobless rate fell to a three-year low of 8.1 percent as people left the labor force, adding to worries that the economic expansion is cooling.
Consumer prices as measured by the personal consumption expenditures index, the gauge preferred by the Fed, rose 2 percent in March from a year earlier, in line with the central bank’s 2 percent inflation goal.
Lockhart, 65, a former Georgetown University professor, has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.