By Steven K. Beckner

Some observers have inferred from the Fed’s revised reinvestment
policy that the Fed might be opening the door to further MBS purchases
in the future. Asked whether the FOMC might devote some or all of a
future asset purchase program to MBS, Lockhart said he did not want to
“speculate on what might be involved in such a policy.”

“I just don’t really know where the committee would come out on
that question,” he said.

Asked whether he personally was open to buying more MBS if QE3 were
to become justified, Lockhart responded, “My view on both the maturity
extension program and the MBS decision is that they will help a little
bit on the margin, but they are not big fixes. I don’t see either, at
least on a stand-alone basis as kick-starts for the economy. I think
they just add to a stance of accommodation.”

“And, consequently, it’s hard for me to see how substantially lower
rates would result and really change the pattern of consumer either
house buying or mortgage refinancing,” he continued. “I think they are
modest measurers, and we should expect modest results from them.”

As MNI has previously reported, Fed policymakers have never
forsworn the option of expanding their MBS holdings if need be to narrow
MBS-Treasury spreads and lower mortgage rates.

Lockhart said “return to an all-Treasury balance sheet is a longer
term objective,” but said “there is simply no time line on it, and I
think the decision to reinvest the run-off of the mortgage-backed
portfolio simply speaks to the flexibility of the committee to address
circumstances as they evolve.”

Some Fed critics, as well as some Fed officials, have warned that
an extended zero rate, large balance sheet stance carries costs and
risks. But Lockhart said it is necessary.

“I think overall we have a very accommodative policy at the moment
and less uncertainty about the path of short-term rates on net is
helpful to actors in making their own plans and decisions,” he said. “I
think the efforts that are underway to achieve lower long-term rates,
and there’s already been some modest success, will also help to create
the best overall conditions for the economy to recover. These policies
amount to support for the recovery.”

He cautioned, however, that “the policies in and of themselves
cannot turn around the economy independent of some other important
structural adjustments occurring.”

Lockhart mentioned a number of “uncertainties” that are “weighing
on business” hiring and investment decisions, including not just the
economic outlook and the Euro crisis, but also taxes and regulations.
But he largely rejected the arguments of some policymakers that the Fed
should desist from easing policy because of those uncertainties.

“There is always a risk that a particular policy action taken alone
might either not be all that efficacious, not produce results or might
in some way produce some unintended consequences,” he said. “There’s
always that risk, but in my view these (latest FOMC steps) were not
really terribly major actions. They simply added incrementally to the
stance of policy.”

Another issue which its critics have raised is that the Fed, by
buying up assets to hold down long-term rates, runs the risks of
wrecking its reputation as an independent central bank and being seen as
aiding the U.S. Treasury to finance the federal budget deficit.

Lockhart stressed that holding down government borrowing costs is
not the intent of Fed easing policies, even if it is the effect.

“Outright monetization is a cardinal sin in central banking;
certainly I would oppose that,” he said. “But what is so often forgotten
is that dealing in the Treasury market is the way we implement monetary
policy. We’re always in a purchase or sale mode at some level with
regard to Treasuries.”

“So I think the way to look at that question is as a matter of
degree, and I do not think that the posture of the Fed now, which to me
is oriented as it should be to support recovery and try to improve
overall financial conditions in the economy for recovery, can be
evaluated as somehow an explicit or conscious attempt to try to improve
the financing terms for the government. I can’t see it that way at

“Whether you look at the interest of savers or any other angle
where there is either gain or harm by the policy, … we only have one
policy,” he went on. “It’s a macroeconomic policy, and it’s designed to
try to nurse the economy to a better place, which is in everyone’s
interest. And those who happen to be borrowers during a low rate
environment, which of course includes the government, obviously benefit
by those lower rates, but that’s not the intent of policy.”

The Fed has come under criticism, not to mention legislative
proposals to change the way it operates, from both political parties.
But Lockhart said he does not see this “political pressure” as having
“all that much impact.”

“I don’t see the politics … let’s say interventions that have
been tried as having really much influence,” he said. “In my experience,
the committee tries to do what it thinks is right for the public and the

Lockhart added that “the apolitical posture of the Committee and
individual members is very important to preserve.”

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