Lockhart Says Fed Faces Risk of Excessive Accommodation

Federal Reserve Bank of Atlanta President Dennis Lockhart
Federal Reserve Bank of Atlanta President Dennis Lockhart said in remarks prepared for a speech to the Latin American Chamber of Commerce and World Affairs Council of Atlanta, “By any number of measures, the strength of the recovery has been and remains disappointing.” Photographer: Patrick Fallon/Bloomberg

Federal Reserve Bank of Atlanta President Dennis Lockhart said U.S. policy makers face a risk of easing too much while trying to spur a “disappointing” three-year-old economic recovery.

“There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources,” Lockhart said today in a speech in Atlanta. While “monetary policy can exert a powerful positive influence on an economy,” it “is not a panacea.”

Lockhart’s comments contrast with remarks he made in July, when he said weak economic data increased the odds he would back more Fed purchases of bonds to reduce borrowing costs. The Federal Open Market Committee, which next meets Sept. 12-13, said on Aug. 1 it will “provide additional accommodation as needed” to reduce an unemployment rate stuck above 8 percent for more than three years.

The Atlanta Fed president, who votes on monetary policy this year, today didn’t offer an opinion on the option of more asset purchases. He has repeatedly told reporters after events this year that he views a deterioration in the economy or a threat of falling prices as among the conditions that could warrant additional easing.

Further Accommodation

Fed Chairman Ben S. Bernanke told lawmakers last month that further easing may include a third round of bond buying or a change to the FOMC’s language on its outlook for interest rates. Bernanke will have the opportunity to update his policy outlook in an Aug. 31 speech to the Kansas City Fed’s annual symposium at Jackson Hole, Wyoming.

U.S. stocks advanced, sending the Standard & Poor’s 500 Index above its highest close in four years, amid speculation that euro-area leaders will make progress in resolving the region’s debt crisis at meetings this week.

The S&P 500 rose 0.6 percent to 1,425.96 at 10:37 a.m. in New York. The index has rebounded more than 11 percent from a five-month low in June. Ten-year Treasury notes dropped, pushing the yield up three basis points to 1.84 percent.

“Anytime you see the equity markets rise, I think what it tells you is there is more appetite for risk,” Lockhart told reporters after his speech. “And in the current context, I would interpret that to be some comment on more confidence that Europe will work through its problems without a major incident of some kind.”

Recent Reports

Lockhart said recent economic reports have been “a little firmer” since July 13, when he said he viewed economic data “with increasing concern and in that sense my receptivity has increased a bit” for more asset purchases.

“It is a cost-benefit calculation to consider more monetary stimulus and someone like me needs to do his best to really carefully weigh the costs and benefits,” Lockhart said today to reporters.

Lockhart also told the audience he backs the Fed’s conditional pledge to keep its target rate near zero through late 2014. “I do think it is appropriate,” he said.

Fed policy makers, who are injecting record stimulus into the economy, have identified Europe’s debt crisis as a threat to the outlook for the U.S., along with budget cuts and tax increases that are scheduled to take effect automatically at the end of the year unless Congress acts.

“The recovery to date has seen weak growth and persistently high unemployment,” Lockhart said in his speech to the Latin American Chamber of Commerce and World Affairs Council of Atlanta. “By any number of measures, the strength of the recovery has been and remains disappointing.”

‘Formidable Challenges’

“Fundamental imbalances” are to blame for the economic weakness and pose “formidable challenges for monetary policy makers,” said Lockhart, 65.

“I will leave it to economic historians to arrive at a verdict” on whether the U.S. or parts of the world are in a “lost decade” of anemic growth, he said. “Our current expansion is not on the track we would wish.”

Real personal income excluding government transfer payments remains 1.5 percent below its level before the recession began in late 2007, Lockhart said. There are more than 4.5 million fewer payroll jobs than in November 2007, and long-term unemployment remains elevated, he said.

Some U.S. economic data has exceeded expectations since the July 31-Aug. 1 FOMC meeting, with employers adding 163,000 jobs in July, the most in five months, and retail sales rising after three months of declines.

The Fed has kept the federal funds rate near zero since December 2008, and its two rounds of asset purchases have swelled its balance sheet to a record of almost $3 trillion.

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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