Fed may ease further if economy worsens: Lockhart
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Fed may ease further if economy worsens: Lockhart

Last Updated: Thursday, September 01, 2011, 09:41
 
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Fed may ease further if economy worsens: Lockhart

Lafayette, La: The Federal Reserve could ease monetary policy further if economic conditions deteriorate and should not rule out any policy options, a top official of the US central bank said on Wednesday.

The US economy remains disappointingly weak and risks to the recovery have risen, said Dennis Lockhart, president of the Atlanta Federal Reserve Bank, though a renewed downturn is unlikely.

"In more adverse scenarios, further policy accommodation might be called for," Lockhart told an event sponsored by the Greater Lafayette Chamber of Commerce. "But as of today, I am comfortable with the current stance of policy."

The Fed's current policy is to keep its balance sheet at around USD 2.9 trillion for "the foreseeable future," Lockhart said, though he warned that monetary policy was not a cure for all economic ills. The Atlanta Fed chief is not a voter on the Fed's policy-setting Federal Open Market Committee this year.

He argued that recent US economic weakness could no longer be explained away by purely temporary factors, and pointed to the job and housing markets as key trouble spots.

"While the risks have increased, I do not expect a recession," Lockhart said.

The Fed cut overnight interest rates to near zero in December 2008 and has bought USD 2.3 trillion in assets to push down longer-term interest rates in the hope of spurring a stronger recovery.

But the economy's performance has remained disappointing, with growth averaging less than 1 percent in the first half of this year and the unemployment rate stuck above 9 percent.

"Slack in our economy is rising even though we are technically in recovery," Lockhart said.

Policy makers at the central bank are divided on whether to take further steps to ease monetary policy.

After a meeting on Aug 9, the Fed said it expected to hold overnight rates exceptionally low at least through mid-2013. While three policy makers dissented on that decision, minutes from the meeting released on Tuesday showed that others had wanted more aggressive action to aid the economy.

Lockhart said the Fed could offer additional monetary stimulus to the economy if growth remained anaemic.

"I don't rule out any policy option," he said in response to an audience question.

With the traditional monetary policy tool of cutting short-term interest rates exhausted, Fed officials are mulling a range of unorthodox measures to strengthen the recovery.

Lockhart said the Fed should tread carefully with one such possibility: targeting a specific level of unemployment when setting monetary policy.

"This idea has come up, I was a bit cautious about it. It's one of those ideas that I want to study a bit more," Lockhart told reporters after his speech.

He also said quantitative easing -- creating money to buy assets -- works best as a response to clear deflationary pressures or a clear drift into recession. Current levels of inflation are not as low as they were a year ago when the Fed launched a new round of bond buying.

In his speech, Lockhart said consumer spending has remained weak, despite a stronger-than-expected increase in July, as job worries and a depressed housing market have contributed to a reluctance to shop.

Overall debt levels in the economy have barely changed, he added, with private sector deleveraging accompanied by a sharp rise in government borrowing.

Bureau Report




First Published: Thursday, September 01, 2011, 09:41


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