–Atl Fed’s Lockhart: Won’t Take Any Policy Responses Off The Table
–St. Louis Fed’s Bullard: ‘We’ll Be Normalizing By Next Year’

By Brai Odion-Esene

WASHINGTON (MNI) – Two regional Federal Reserve Bank presidents
Friday cautioned against any expectation that monetary policymakers will
step in to counter any damaging effects to the economy from the
stand-off on Capitol Hill over raising the debt ceiling.

In a joint interview with his St. Louis counterpart on CNBC,
Atlanta Fed President Dennis Lockhart said he sincerely hopes a U.S.
default does not occur, calling it essential that the debt limit is
raised.

“Failure to raise the debt ceiling would have unpredictable
consequences for the U.S. economy,” St. Louis Fed President James
Bullard added, although he believes a deal with get done eventually.

Many have speculated that the Fed will be forced to step in if the
debt ceiling is not increased, but Bullard noted the central bank cannot
do anything “directly” to fix the situation.

The Fed can only buy government securities on the secondary market,
and not directly from the Treasury, he said. If the inability of the
Treasury to issue debt led to a generalized crisis, We can come in and
provide liquidity to markets as we did in 2008 and 2009,” Bullard said.

Lockhart, however, echoed recent comments made by Fed Chairman Ben
Bernanke, warning there should be no expectation the Fed will intervene.
“Don’t look to the Fed to offset the damage that could be incurred
here,” he said.

However, “You never say never when it comes to policy options you
may have,” Lockhart continued. “I wouldn’t take any policy options off
the table to respond to a really bad economy.”

Asked to comment on Friday’s release of stunningly weak first half
GDP numbers — a paltry +1.3% in Q2, +0.4% in Q1 — Bullard said the
data confirmed what the Fed already knew, pointing to higher oil prices,
Japan-related disruptions and the EU sovereign debt crisis. All that
remains to be resolved is the ongoing U.S. fiscal situation, he said.

“I do think we’ll get a deal, and then we’ll have those
uncertainties off the table. I think we are in better shape for better
growth in the second half of the year,” Bullard said.

If the second half of 2011 is strong, and carries over into 2012,
“I think certainly we can begin to see the conditions developing where a
serious discussion of exit is possible,” Lockhart said.

“I think we’ll be normalizing by next year,” Bullard declared,
although he refused to be pinned down on the exact timing.

Commenting on current monetary policy, Bullard noted that the Fed
already has “an ultra-easy” policy in place, which is threatening
higher inflation in the economy. “We have to be cognizant of that going
forward,” he said.

Lockhart noted that the rise in core inflation has lasted longer
than he expected, with continued pass-through effect. However, he said
he still expects inflation to subside — both at the headline and core
level.

“The transitory inflation story will, and is in fact, playing
through,” he said.

Bullard said he focuses more on headline inflation data, saying it
is “incumbent” on the Fed to accept that headline inflation has moved
up. “It’s higher than we’d like it to be, we do think it will come down
but we are going to watch it very carefully,” he said.

On the subject of whether the Fed ought to engage in additional
quantitative easing to boost the economy, Lockhart reiterated that “it’s
a very high bar” for a third round of QE, although he would not rule it
out completely.

“Now we need to wait and see,” he said. Lockhart said he shared
Bullard’s view that the economy will be stronger in the second half of
2011 and the picture will be much better at the end of the year.

“I’m quite willing to say policy is about right where it needs to
be for the moment,” Lockhart said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$CR$]