Fed’s Lockhart Says Markets May Have Misread Bernanke Plan

Federal Reserve Bank of Atlanta President Dennis Lockhart, who has supported Fed stimulus, said investors may have overreacted to Chairman Ben S. Bernanke’s announcement the central bank could start scaling back record stimulus this year.

“Financial markets have been volatile recently” and may reflect a “different interpretation” of Bernanke’s message last week, Lockhart said in a speech today in Marietta, Georgia. He doesn’t vote this year on monetary policy.

Using an analogy to a cigarette smoker trying to quit, Lockhart said “it seems to me the chairman said we’ll use the patch and use it flexibly, and some in the markets reacted as if he said ‘cold turkey.’”

Policy makers are considering when to end the biggest stimulus program in the Fed’s 100-year history after pushing central-bank assets to a record $3.47 trillion. Bernanke said June 19 the Fed may trim its $85 billion in monthly bond buying this year and end it around mid-2014 if the economy grows in line with the central bank’s forecast.

“In my view, the comments by the chairman do not constitute an enormous shift in policy,” Lockhart said to the Kiwanis Club of Marietta. “I still anticipate that the very low interest-rate policy will remain in place for a considerable time after the end of asset purchases, and thus policy will remain highly accommodative.”

Rising Yields

Bernanke’s comments after the Federal Open Market Committee meeting have helped pushed up market interest rates. The yield on the 10-year Treasury note rose to 2.54 percent yesterday from 2.19 percent June 18.

“The pace of purchases, the composition of purchases, and the ultimate size of the Fed’s balance sheet still depend on how economic conditions evolve,” Lockhart said. “All elements of the asset-purchase program will be considered on a meeting-by-meeting basis in light of the incoming data and economic outlook.”

Lockhart told reporters after his speech his comments today and those by other Fed speakers, including New York Fed President William C. Dudley, weren’t coordinated as a way to clarify Bernanke’s message. “There is no concerted single strategy,” he said.

Less Joblessness

The U.S. unemployment rate is likely to be 7.2 percent to 7.3 percent by year-end, Lockhart said. However, if the labor market makes faster progress and unemployment fell to 7 percent late this year, Lockhart said he might support scaling back bond buying earlier than is now envisioned.

“If we were to get to that level in my mind we would have accomplished substantial improvement at a faster pace and I would be very open to considering then a faster pace of reduction in purchases,” he said.

The Fed has kept its benchmark policy rate near zero since December 2008. In his speech, Lockhart estimated that the first increase in the federal funds rate, which will be dependent on how the economy evolves, may occur in 2015.

U.S. growth is likely to be about 2 percent to 2.5 percent this year, with an acceleration in the second half, and inflation will be gradually moving higher toward the Fed’s 2 percent target, Lockhart said.

A former Georgetown University professor, Lockhart, 66, 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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