Fed’s Lockhart Says Aggressive Easing Needed to Spur Jobs
Federal Reserve Bank of Atlanta President Dennis Lockhart said forceful central bank policies will remain needed to spur job growth even if Congress averts sudden tax increases and spending cuts at the end of the year.
“I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time even if fiscal cliff issues are properly addressed,” Lockhart said today in Charlottesville, Virginia. Fed easing isn’t aimed at “abetting” fiscal policy by reducing the cost of financing the federal deficit, he said.
The Atlanta Fed chief voted with the Federal Open Market Committee in October to continue buying $40 billion in mortgage bonds each month until the labor market improves “substantially.” The central bank is also purchasing $45 billion of longer-term Treasuries in a securities-swap program called Operation Twist scheduled to end in December.
“I am not prepared to say we are remotely close to substantial improvement on the employment front,” Lockhart said in a speech to the University of Virginia Investing Conference.
Lockhart said he may be willing to support a strategy of announcing the Fed won’t increase the main interest rate from close to zero before hitting numerical thresholds for the unemployment rate and inflation.
“It’s possible to get to a threshold number for unemployment as long as we present it as indicative of a broader evaluation” of labor-market conditions, Lockhart told reporters after the speech.
Chicago Fed President Charles Evans has proposed holding interest rates near zero until unemployment falls to 7 percent so long as inflation does not breach 3 percent. Minneapolis Fed President Narayana Kocherlakota has suggested continuing with zero rates until unemployment falls to 5.5 percent so long as inflation remains below 2.25 percent.
“We are likely to have to begin to tighten before we get to full employment,” Lockhart told reporters. “So I am more comfortable with one of the interim target numbers, say 7 percent, conceivably 6.5 percent” as the unemployment rate threshold. Currently the jobless rate is 7.9 percent.
Chairman Ben S. Bernanke has said the economy is vulnerable to the so-called fiscal cliff, the more than $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. The Congressional Budget Office said in an Aug. 22 economic report that fiscal tightening of that magnitude could cause a recession.
Failure to avert the fiscal cliff may create “new challenges to monetary policy and an uncomfortable tension between monetary policy and fiscal policy,” Lockhart said in his speech. In response to an audience question, he said, “there is no direct link in terms of intention between the low- interest rate policy and the financing of the deficit.”
U.S. stocks rose today, erasing earlier losses, as House Speaker John Boehner said he had constructive talks with President Barack Obama on the budget and would accept government revenue increases coupled with spending cuts. The Standard & Poor’s 500 Index rose 0.5 percent to 1,359.88 in New York trading.
Even with a resolution of fiscal challenges, the labor market will warrant continuing central-bank stimulus, Lockhart said.
“There is still a disproportionate share of part-time jobs reflected in the overall employment gains, long-term unemployment remains unacceptably high,” Lockhart said. “Labor force participation rates are still surprisingly low, and initial unemployment gains have not yet fallen to levels that seem consistent with a truly robust jobs picture.”
Under Operation Twist, the Fed is buying about $45 billion a month of longer-term securities to replace the same amount of short-term debt that is maturing or being sold.
“A decision will have to be made as to whether to replace it by another round of Treasury securities purchases,” Lockhart said. Lockhart told reporters after the speech that he was “not yet ready to indicate” if he supported additional Treasury purchases in 2013.
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