By Steven K. Beckner

ATLANTA (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Tuesday took a very cautious approach to consideration of
additional monetary stimulus, neither ruling it in or out.

But Lockhart sounded a bit less inclined to support additional Fed
easing than he did in mid-July in wake of economic and financial
developments that he said he found encouraging.

Lockhart, a voting member of the Fed’s policymaking Federal Open
Market Committee this year, said that if the FOMC does decide that more
accommodation is needed he would favor using the tool that has the most
“discernible effect.” But he didn’t identify what that would be.

Speaking with reporters following a breakfast address to the Latin
American Chamber of Commerce and the World Affairs Council, Lockhart was
asked whether he thinks the economy needs more Fed stimulus. His
response was noncommittal.

“I’m in the process of weighing all the considerations that go into
any change in policy or any additional policy, and I’m not finished with
my process,” he said. “I think it’s a cost-benefit calculation to
consider more monetary stimulus.”

He said he is trying to think ahead up to three years in
considering what more, if anything, the economy needs from the Fed.

In prepared remarks, Lockhart had said “there is a risk to monetary
policy being employed too aggressively and without effect to address
economic problems that can be resolved only by fiscal reforms,” and said
“monetary policy is not a panacea.”

Lockhart sounded distinctly more ambivalent about additional
stimulus than he did at a July 13 appearance in Jackson, Mississippi.

While saying then that more quantitative easing would not be “a
miracle cure,” he warned, “If the economy continues on the track
indicated by the most recent incoming data and information,” his
forecast of stronger growth and employment “will become untenable, as
will the policy premises underlying it.”

He told reporters on July 13 that he had 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 (to QE3) has increased a bit.”

“If I felt the economy required it — speaking for myself — I’d
have no reticence in taking action,” Lockhart added.

Referencing those comments, MNI asked Lockhart whether recent more
positive economic data had caused him to take a step back from QE3.

“The data just recently have been a little firmer,” he replied,
“and I think that certainly can influence how ready a policymaker might
be to make a move at a particular point of time.”

Lockhart added that he is “increasingly framing the question as
more of a three-year plus outlook kind of question … . What’s the
outlook from here? … . That’s the way to frame the question whether
more policy is needed or not.”

Lockhart also said the recent stock market rally has been
“encouraging” in that it shows “more appetite for risk.” The rally shows
that markets are “discounting” the economic outlook “more favorably.”

He said the rally suggests there is “more confidence that Europe
will work through its problems without major incident of some kind …
. It adds to a more confident atmosphere … . It’s part of the cause
and effect of getting the economy moving.”

On another upbeat note, Lockhart said he “see(s) far less risk in
the housing sector … . It certainly appears to be stabilizing,
improving.”

“That’s an important sector of the economy,” he said. “The level of
activity in housing is quite a bit lower, but the direction is
encouraging.”

As for the dreaded “fiscal cliff,” Lockhart said it is having some
adverse effect on the economy, but he suggested that the Fed should not
necessarily base monetary policy on those near-term effects.

“My own expectation is that Congress will find a way to handle that
so that the most severe calculations of the effect on GDP don’t come
about,” he said.

Responding to an MNI question about how the Fed should figure
fiscal drags into monetary policy, Lockhart said he believes “you have
to premise policy on an outlook that takes into consideration some
contingencies related to fiscal matters that could produce more
downside.”

“In my own base case, I’m not assuming the worst case scenario,” he
continued. “At the same time recognize that there’s already some
discounting of that possibility affecting the economy right now … . But
in general you have to look past that event and think in terms of the
more medium-term outlook.”

“My assumption is that (the fiscal cliff) will be dealt with by the
Congress,” he reiterated.

Lockhart expressed dissatisfaction with the pace of job growth, but
stressed that the July rise in the unemployment rate from 8.2 to 8.3%
was due to “rounding” and should not be overemphasized.

He said deflation is “on my radar screen,” with inflation running
slightly below the Fed’s 2% target, but said, “I don’t think at the
moment that it’s something I need to factor into my own thinking as a
real risk.” He said higher oil and food prices are likely to raise the
inflation rate back above 2%.

Asked by MNI what his preferred tool would be if the FOMC does
decide on Sept. 12 or beyond that more easing is needed, Lockhart
initially said he didn’t want to talk about his preferred tool “because
it’s not yet decided that’s the course of action.”

But, he added, “if the conclusion is that the economy needs more
support clearly we ought to use a tool that has the potential to provide
support.”

Most officials and Fed watchers think that asset purchases would be
the most potent tool. Asked by MNI if that’s what he had in mind, he
said the FOMC would “have to make an evaluation of that tool that is
likely to have a discernible effect.”

Earlier, in response to a question from the audience about when the
Fed will begin raising interest rates, Lockhart said he “stands by” the
FOMC’s Aug. 1 statement, which reiterated that it expects the federal
funds rate to stay near zero “at least through late 2014.”

That is “another way of saying I expect interest rates will remain
stable or low for close to another two years,” he said.

Lockhart said the FOMC’s conditional commitment to delay rate hikes
until at least late 2014 is “appropriate policy given the state of the
economy.”

But he emphasized, “We review that policy at each meeting, so you
should not take that as a cast-in-stone commitment … . It is
conditioned on the state of the economy and the outlook at any given time
when we’re reviewing policy.”

** MNI **

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