Fed Not in the ‘Danger Zone’ as Exit Approaches, Lockhart Says

Federal Reserve Bank of Atlanta President Dennis Lockhart said he thinks the central bank can handle its exit from quantitative easing when the time comes, despite uncertainty caused by a balance sheet close to $4 trillion.

“At the moment, I don’t think we are in the danger zone,” said Lockhart, who is not a voting member of the policy-making Federal Open Market Committee this year. “The exit will be manageable when the time comes.”

Lockhart, who was speaking in an interview on CNBC television, said he’s not “overly worked up over this,” though the Fed has never before been in a position where it had to manage and normalize such a large balance sheet.

“There is a fair amount of uncertainty related to the longer-term consequences of growing the balance sheet,” according to Lockhart. “There could be some things that happen that are unanticipated.”

He said the shrinking of the balance sheet is “in all likelihood, years ahead of us” with “plenty of time to prepare.” The balance sheet now stands at $3.91 trillion.

The FOMC will probably dial down its unprecedented $85 billion in monthly bond buying to $70 billion at a March 18-19 meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8.

Employment Progress

The Atlanta Fed chief, who has backed the record stimulus, reiterated today that the benefits of easing have outweighed the costs, and said he has seen progress in employment. He said he expects the FOMC to discuss tapering at its meetings in December, January and in March, and should begin the reduction when markets and the economy are prepared to handle it.

“The bigger the balance sheet gets, the more we’re dealing with an unknown factor in the economic future of the country,” he said. “We’re going to remain very accommodative for quite some time, in all likelihood a number of years, but the mix of tools that we use can change, and that’s where the tapering decision comes in.”

Lockhart, 66, has been president of the Atlanta Fed since 2007. Prior to that, he was a professor at Georgetown University.

Before it's here, it's on the Bloomberg Terminal.