By Brai Odion-Esene
JACKSON, Mississippi (MNI) – Atlanta Federal Reserve Bank President
Dennis Lockhart Friday said while he remains on the fence regarding the
need for additional monetary stimulus to boost job growth, his
“receptivity” towards the idea has increased “a bit.”
His comments, made to reporters following a speech to the
Mississippi Economic Council in Jackson, Mississippi, underlines the
conundrum the central bank faces as it contemplates whether or not to
once again venture into unchartered territory to aid the weak economy.
Lockhart also declared himself “very comfortable” with the
expectation of the Federal Open Market Committee, the Fed’s steering
group, that interest rates will likely need to remain at exceptionally
low levels until late 2014.
If the Atlanta Fed’s forecasts are “substantially adjusted because
we just don’t see the track of the economy, that we are now expecting,
coming about, then I will certainly consider further action,” he said.
Lockhart is a voter on the FOMC this year.
Lockhart said while up to four participants at the June FOMC
meeting were in favor of more stimulus to help the economy and job
growth, the remainder are split between some that are against the idea
and some that are on the fence.
“I would call myself a little bit more on the fence at this point,”
he said.
Lockhart said he will wait for more economic data to provide
clarity on “are we dealing with something that is transitory or
persistent.”
So what would it take for him to support additional easing? “It
would take, basically, some more bad news and a more convincing picture
that an economy that we thought was growing on a gradual curve is
slowing down,” he said.
In addition, it would require the unemployment rate — which is
still coming down — to flatten out and become “more stagnant,” Lockhart
added.
He reiterated that if that picture becomes “very convincing,” there
may be a shift in his position on the need for additional stimulus this
year.
Still, additional quantitative easing remains an option on the
table and will not be dismissed as one, Lockhart said.
“I have been watching the economic data and listening to what
people tell us about what’s going on in the economy with increasing
concern, and in that sense … my receptivity has increased a bit,” he
said.
“If I felt the economy required it — speaking for myself — I’d
have no reticence in taking action,” Lockhart added.
While it is important to consider the costs of a third round of
quantitative easing, Lockhart reiterated that any risks over the longer
term — particularly with regard to inflation pressures and normalizing
the balance sheet — “are manageable.”
“So I don’t think, at the moment, that concern about that so
outweighs the modest benefits as to take that option off the table,” he
said.
Lockhart told reporters the FOMC would have to consider a range of
possible approaches, if and when further quantitative easing gets
serious consideration, “and in my mind that could very well include
mortgage-backed securities.”
It is important — given the way the economy is performing and the
marking down of their outlooks by many on the FOMC — “to keep an open
mind and be flexible about what incremental policy might look like,” he
said.
Lockhart said, in theoretical terms, the obvious advantage of MBS
purchases, would be to put pressure on mortgage rates and make
first-time home purchases more affordable.
“That would have a positive effect on the housing industry in
general,” he continued, “including the construction aspect.”
Lockhart also stressed that the Fed’s decision to extend ‘Operation
Twist’ by $267 billion through the end of the year does not preclude
additional action by monetary policymakers this year to support the
economy.
“I think you have to view policy as a cumulative and composite
stance of elements that represent policy,” he said. “We could add
another dimension, and, in my view, don’t need to wait for the expiry of
something else that is part of the policy mix.”
Asked by MNI if he has adjusted his forecast for when the first
interest rate increase by the FOMC will happen, Lockhart noted he had
pulled forward his expectation of the first rate hike “to some degree”
at the group’s April meeting.
Now, however, “With the recent slowing of the economy, the recent
data that has come in, I am very comfortable with late-2014,” he said.
Lockhart said the FOMC’s view of the world changed “pretty rapidly”
at its June meeting and that the broad view of the committee now is that
the economy is in a “slowing period.”
He acknowledged that monetary policy is a blunt instrument that can
only have an impact on a macro level as opposed to targeting particular
sectors of the economy. Still, “nurturing the economy back to full
potential is in all our interests,” Lockhart said.
As for Europe, Lockhart said the crisis there is “front and
center,” with Fed officials monitoring events very closely.
A major risk, he said, is the potential for an unexpected event on
the continents to create a major contagion that spreads throughout the
global financial system and affect liquidity, he said.
Another risk of the Europe crisis is its negative impact on
confidence, Lockhart added, noting that concern about the eurozone is
part of the overall mix that businesses cite as fueling their
hesitancy.
The minutes of the June FOMC meeting published Wednesday showed
several members said it would be desirable to explore the possibility of
“developing new tools to promote more accommodative financial conditions
and thereby support a stronger economic recovery.”
Lockhart said new ideas are worth exploring, such as using the
discount window for supporting particular channels of credit or kinds of
loans.
“That’s something that could be studied,” he said.
** MNI **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$X$$$,M$$CR$]
