Lockhart Calls Unfounded the View That Fed Monetizes U.S. Debt
Federal Reserve Bank of Atlanta President Dennis Lockhart rebutted critics of the central bank who say its policies are monetizing the national debt or encouraging more deficit spending.
“I object to the view that the Fed is monetizing the debt,” Lockhart said today as part of a panel discussion at the University of Iowa in Iowa City.
Fed officials led by Chairman Ben S. Bernanke have said repeatedly they would not try to monetize debts by increasing money and stimulating inflation. Bernanke has urged Congress and President Barack Obama to put fiscal policy on a sustainable path.
The “coincidence” of accommodative monetary policy and increases in the government’s debt “doesn’t mean they are connected,” Lockhart said at a University of Iowa School of Law conference entitled “Fiscal Reform, Monetization or Default: How Will the United State Solve the Problem of its National Debt?”
“Fiscal reform is the only real option in the title of this conference,” Lockhart said.
The administration forecasts that the federal budget deficit for the fiscal year that begins Oct. 1 will be $744 billion, or 4.4 percent of the economy. The Office of Management and Budget estimates that the shortfall this year will be $973 billion, or 6 percent of the economy.
Lockhart said it’s not true that the Fed is holding interest rates down to reduce the government’s financing costs and encourage deficit spending.
“The accusation of intentional suppression of government financing costs is unfounded,” he said. “The Fed has to try to ease financial conditions” and keep interest rates low “until the economy improves.”
Growth likely slowed in the current quarter to an annualized rate of 1.5 percent from an estimated 3 percent in the first quarter, according to the median forecast among 69 economists surveyed by Bloomberg News from April 5 to April 9. Growth for the year is expected to be about 2 percent, the survey showed.
“I have been supportive of accommodative policies and I continue to do so,” he said.
The Atlanta Fed president, who doesn’t vote on monetary policy this year, has supported the central bank’s monthly purchases of $85 billion in Treasuries and mortgage-backed securities as a means to try to bring down 7.6 percent unemployment. Fed officials are considering how quickly to slow purchases amid mixed signs for the labor market, with 88,000 jobs added in March in the smallest gain in nine months.
Lockhart responded on the panel to criticism from Carnegie Mellon University professor Allan Meltzer, an economist and author of a history of the Fed, who called the Fed’s current stance “a cockeyed policy” and said asset purchases were having “very little effect” on the economy while potentially stoking asset price bubbles and inflation.
While the expansion of the Fed’s balance sheet creates “some risk” of rising inflation expectations, “that chemistry is not at work today and it will take substantial credit growth to materialize,” Lockhart said.
The Fed “has a variety of tools to counter such pressures,” Lockhart said, mentioning the central bank’s ability to pay interest on excess bank reserves. That power “gives us greater control over monetary policy than before that tool existed,” he said.
Minutes of the March 19-20 Federal Open Market Committee meeting released April 10 show that a number of Fed officials said the central bank should begin tapering its bond buying program later this year and stop it by year end.
Bernanke said last month the central bank would alter monthly buying in response to gains in the job market, underscoring a need for flexibility. He said further gains would be needed to be sure “this is not a temporary improvement.”
A former Georgetown University professor, Lockhart 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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