–Fed Has Will To Act, Or Not, As Conditions Dictate
–Slow Econ, Low Infln Means Cannot Dismiss Deflation Risk
–Believes Slowdown In Economic Expansion Is Temporary
By Brai Odion-Esene
WASHINGTON (MNI) – In the coming weeks U.S. monetary policymakers
must come to grips with the question of whether there is anything they
can do to improve the situation in the economy and, if so, what that
action should be. So said Dennis Lockhart, president of the Federal
Reserve Bank of Atlanta.
In remarks prepared for The University of the South in Sewannee,
Tenn. Lockhart said the circumstances of weak recovery, persistent
unemployment, dangerously low inflation and the policy interest rate at
the zero lower bound “present a tough analytical challenge.”
He also argued, however, that he believes the slowdown in economic
expansion within the U.S. is “temporary” and is primarily the result of
high levels of uncertainty among businesses and consumers. This
uncertainty, Lockhart said, is in turn fueled by issues such as high
unemployment, government policies, and fears of a resurgent debt crisis
in Europe spreading to these shores.
Expanding on the dilemma monetary policymakers face going forward,
Lockhart said there are three lines of argument as he sees it. The
first maintains there is not enough spending occurring and this can be
addressed by further stimulus.
“The second argument is that the economy is undergoing deep
structural adjustments in industry composition, labor markets and
household finances, especially the level of debt, and these adjustments
will take considerable time to play out,” he continued.
The final argument is that much of the uncertainty has to be
dealt with in other areas of government, Lockhart said, and monetary
policy can not do much about this kind of problem.
“As I see it, this debate will intensify over the coming weeks,”
Lockhart predicted. Lockhart will be an FOMC voter in 2012.
And while he cannot foresee how the economic policy story will play
out, “I can assure you, however, that the Fed has scope for further
action to influence the course of recovery,” he said. “And, importantly,
I believe the Fed and the Committee have the will to act-or not-as
demanded by economic conditions in the near term.”
Lockhart said if action is taken by the Fed, a clear option is to
grow the size of the balance sheet since the policy interest rate cannot
be slashed further.
But will it work? Lockhart asked. And, how much would be needed to
make a difference? “In my view, a consensus on these pivotal questions
remains to come together,” the Fed president said, refusing to take a
position on the issue in his remarks. All he would say is that in the
weeks ahead, both he and his staff will be tackling these and related
questions to prepare for the important decisions coming.
On economic activity and the slower-than-expected recovery,
Lockhart was more bullish and predicted that the slowdown will prove to
be temporary. “In my view, much of the strength we saw last fall and
winter was a consequence of policies that brought forward spending that
would have occurred later,” he said.
Conditions in the labor market do remain disappointing, and
Lockhart warned that growth at this current “anemic level” is unlikely
to generate enough new jobs to bring down unemployment to any
Given the growth of population, he said, at least 150,000 jobs need
to be created per month to make significant progress on the unemployment
Noting the concerns raised by the Federal Open Market Committee
last week regarding the low levels of inflation, Lockhart said while he
does not expect outright deflation to develop, the slowing of the
economy in the middle of this year — combined with a very low measured
rate of inflation — “suggests to me the risk of deflation cannot be
Seeking to explain what he described as “this troublesome situation
of slow growth and too-low inflation,” Lockhart pointed out that his
business people cite the elevated state of uncertainty as a reason they
are reluctant to hire and are very careful about investment spending.
“To be more specific, my business contacts point to the uncertain
path of the economy itself as well as the direction of fiscal,
regulatory, and tax policies,” he said.
Others worry that the recent sovereign debt crisis in Europe might
return and bring stress in financial markets and the banking system,
even here in the United States.
Consumers are not immune from this fog of uncertainty, with
spending habits reined in because of the still-treacherous job situation
and concerns about which way the value of houses might go.
** Market News International Washington Bureau: 202-371-2121 **