–In US Interest To Quell Liquidity Strains in U.S. Dollar Markets

By Yali N’Diaye

WASHINGTON (MNI) – The Federal Reserve is not out of options should
additional actions be needed, Atlanta Federal Reserve President Dennis
Lockhart said Monday, although the hurdle for any additional monetary
stimulus “should be high.”

And while noting that current market volatility has not translated
into a lack of liquidity in the banking system, he emphasized the Fed
“has ample tools to deal with any reemergence of acute financial or
liquidity strains in dollar funding markets here and abroad.”

“Given the interconnectedness of global markets, it is in the best
interest of the U.S. economy to quell liquidity strains in dollar
markets when they arise,” he said in remarks at the Rotary Club of
Florence and the Greater Shoals/Sheffield Rotary Club Florence, Ala.

Lockhart, who will be a voting member of the Federal Open Market
Committee in 2012, revised down his economic forecasts, but still
expects the recession will be avoided.

So overall, while “monetary policy needs to be very supportive of
growth as the recovery seeks to regain its footing,” Lockhart expressed
caution regarding additional stimulus.

“Conditional on stable inflation expectations, I believe
maintaining the current low interest rate environment is the right
posture for the time being,” he commented.

That said, “As I see it, we do not yet have enough information to
conclude the economy won’t resume a healthier pace of growth,” he
argued. “I still maintain that a resumption of growth is the most likely
case.”

Yet, the recent market volatility has added uncertainty to the
outlook, and “If the loss of stock market value persists, the effect
from the loss of investment value could combine with the loss of value
in home prices to discourage consumers more and longer,” Lockhart said.

Hence his primary concern for consumer spending.

And should a recession occur, he said expanding the size of the
Fed’s balance sheet and changing the composition are “available”
options.

“These could be quite effective, particularly if done in sufficient
size, in the event that the economy retreats back into contractionary
territory,” he said.

He added, “The FOMC has not been explicit about the likely timing
of changes in the size of the Federal Reserve’s now-large balance sheet.
But it makes sense to me that policies related to the overall size and
composition of assets on the balance sheet should align with explicit
rate policies.”

According to Lockhart’s base case scenario, however, the first half
of the year should prove to be a soft spot in an otherwise moderate
recovery. In this environment, further stimulus “is probably of limited
marginal value.”

Besides, Lockhart noted the recent market volatility has not
“impaired the credit channel,” adding that the “cost of credit remains
low.”

He attributed the stock market volatility to concerns about the
economy and U.S. and Europe’s sovereign ratings.

Those have particularly hit bank stocks, also affected by
bank-specific issues, Lockhart said, rather than reading the decline in
bank stocks as a reflection of general funding concerns.

In addition, there are sectoral strengths “that will serve to
counter forces of weakness in the second half of this year and into
2012.”

So for now, while it is “right” for the Fed to maintain a low
interest rate environment, Lockhart warned against jumping to
conclusions.

“A clearer picture of economic reality will be revealed in time as
immediate uncertainties dissipate,” he said.

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

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