Fed May Need to Begin New Asset Purchases, Lockhart Says

Atlanta Federal Reserve Bank President Dennis Lockhart
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. Photographer: Jonathan Alcorn/Bloomberg

Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank may need to begin a new program of asset purchases if recent economic weakness continues and undermines his forecast for a pickup in the second half of the year.

“If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it.” Lockhart said today in Jackson, Mississippi. “My support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013.”

Lockhart joins the ranks of Fed officials who are prepared to consider additional stimulus after a report showed that payroll growth lagged behind forecasts in June. The Atlanta Fed president cited the release of minutes from the central bank’s last meeting as showing as many as four policy makers are “quite receptive at this time” to further easing.

The policy-making Federal Open Market Committee voted last month to extend its maturity-extension program, known as Operation Twist, to provide more support for a slowing U.S. economy and said it would consider additional stimulus if needed.

“My colleagues and I on the FOMC may confront a decision on whether or not to respond more aggressively to the economy’s apparent weakness,” Lockhart told the Mississippi Economic Council. “It’s possible another policy decision looms.”

Stocks Rally

U.S. stocks rallied, erasing a weekly loss for the Standard & Poor’s 500 Index, as JPMorgan Chase & Co. jumped after reporting earnings. The S&P 500 gained 1.7 percent to 1,356.78 at 4 p.m. New York time and advanced 0.2 percent for the week.

Treasury 30-year bond yields rose from almost record lows amid speculation central banks around the world will take more action to stimulate the economy. The 30-year bond yield rose one basis point, or 0.01 percentage point, to 2.57 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It fell to an all-time low of 2.5089 percent on June 1.

Lockhart, who votes on monetary policy this year, told reporters after the meeting that his view on the need for further action has shifted gradually.

‘Increasing Concern’

“Certainly from my own perspective it has been an option on the table, and I don’t dismiss it as an option,” he said. Lockhart has viewed recent economic data “with increasing concern and in that sense my receptivity has increased a bit” for more asset purchases.

Lockhart told reporters that asset purchases could include mortgage-backed securities, which would put pressure on home loan rates and help strengthen housing.

Employers added 80,000 jobs in June, and the unemployment rate stayed at 8.2 percent, the U.S. Labor Department reported July 6. Growth in private payrolls was the weakest in 10 months. The figures underscore concern among some Fed policy makers that growth isn’t fast enough to lower unemployment stuck above 8 percent since February 2009.

In June, Lockhart said he might favor more asset purchases if there were “a deteriorating economic situation that takes me off my baseline forecast” or threat of falling prices. He said conditions didn’t call for easing “at the moment.”

Lockhart, 65, said he downgraded his economic forecasts prior to the latest FOMC meeting in response to weakness in the first half of the year. This was his first speech since the June employment report.

‘Modest Expectations’

The Atlanta Fed president said asset purchases and expansion of the balance sheet are not a “miracle cure” yet are still effective. “I think we should have modest expectations about what further action can accomplish,” Lockhart said.

“Some further use of the balance sheet to promote continued recovery and/or financial stability brings with it manageable risks,” he said. “Reversal of the cumulative balance sheet scale and maturity structure can be accomplished in an orderly manner. But the step of additional balance sheet expansion should be undertaken very judiciously. Such a step would take us further into uncharted territory.”

Lockhart also said he viewed most of the weakness in the labor market as resulting from weak demand rather than structural a mismatch of job skills with openings.

Policy Tool

Federal Reserve Bank of San Francisco President John Williams said July 9 that the central bank should maintain “extraordinary vigilance” and the most effective policy tool would be more asset purchases including mortgage-backed securities.

Lockhart has never dissented from an FOMC decision. He told a Florida audience that extending Operation Twist was “an option on the table” two weeks before the FOMC chose that course.

Lockhart, 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.

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