By Steven K. Beckner
ATLANTA (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Thursday said that to support a third round of “quantitative
easing” he would want to see a combination of recessionary trends, a
renewed threat of deflation and “more receptive” credit market
conditions.
Lockhart, a voting member of the Fed’s policymaking Federal Open
Market Committee this year, indicated he did not expect such a situation
in a session with reporters, although he is concerned about the
potential contractionary influences of high gasoline prices and about
remaining risks from Europe.
Earlier, in prepared remarks to an Atlanta Fed banking conference,
Lockhart expressed support for continuing to hold the federal funds rate
near zero, but expressed skepticism about the need for QE3.
“I’m cautious about doing more involving expansion of the Fed’s
balance sheet,” he said. “Precisely because I see the transmission
mechanism of monetary policy through credit channels as constricted, I
have my doubts that the gains from such a policy action taken in the
near term would outweigh the longer-term potential costs, including the
risk to the Fed’s medium-term inflation outlook.”
Asked by MNI what conditions would need to prevail for him to back
QE3, Lockhart said “one would be downside developments” both with regard
to economic growth and with regard to inflation.
He recalled that when the FOMC launched QE2 in November 2010,
“conditions were those of declining inflation expectations headed in
what appeared at the time to be a dangerous direction.”
If there were to be “an onset of recessionary conditions and a
movement in a deflationary” direction, Lockhart said “we would have to
consider further balance sheet kinds of stimulus.”
Alluding to earlier remarks about the normal credit conditions —
or the “monetary transmission mechanism” — being “clogged,” Lockhart
said “a second conceivable possibility” that could lay the groundwork
for QE3 would be “more receptive conditions (in credit markets) combined
with a clear need of some kind.”
If credit channels were to become less clogged in a situation where
economic and financial conditions otherwise seemed to call for QE3 then
“if we do something it would have a measurable effect,” he said.
Lockhart said the first quarter is apt to be slower than the fourth
quarter but said he expects real GDP growth of 2.5% to 3% — barring
another “shock.” But that can’t be ruled out, he said.
Asked about rising gasoline prices, Lockhart said he is concerned
about “both” their inflationary and contractionary influences. He said
that once gasoline prices exceed $4 they have historically been “a
matter of some concern … . Once you’re above ($4) that bites income
and discretionary spending of many families.”
“We’re certainly getting into a zone where we have to have some
concern,” he added.
Europe is another potential pitfall for the economy, he said.
Earlier, in response to an audience question, Lockhart jokingly
quoted Wells Fargo chief economist John Silvia as saying that the
European debt crisis is “a problem that gets solved every Friday.”
So while “the latest news is relatively positive,” he said he
“still view(s) it as a risk. You can’t take it off the table as a
(potential) shock.”
At the very least, he said Europe’s economic and financial
difficulties are apt to mean slower U.S. exports and tourism. He said
“we have to watch the situation closely.”
Also weighing on the economy, according to Lockhart’s Southeast
business contacts, are uncertainties about government regulation,
particularly in the areas of health care and banking.
He said there is “an overall sense of caution because of
uncertainty that continues to be a drag on the economy.”
Lockhart said the hundreds of regulations being written to
implement the Dodd-Frank banking legislation is “has contributed to an
atmosphere where banks are cautious about growing their loans.”
He also said he has heard anecdotally that government-sponsored
enterprises Fannie Mae and Freddie Mac have “dramatically” tightened
mortgage lending standards to a “rather remarkable” extent. He said this
“means fewer people are able to qualify or are willing to go through
that process.”
As for interest rate risks facing banks, he said the rate outlook
is “never perfectly clear,” but said the Fed’s communication of its
intent to keep the federal funds rate near zero has put interest rate
risk management “in a much more manageable state.”
Asked by MNI whether it would be useful for the Fed to cut the
interest rate it pays on excess reserves (IOER) from 25 basis points,
Lockhart said “I don’t believe changing that policy by reducing the
amount or eliminating it altogether is going to necessarily create a
strong spurt of lending activity.”
Lockhart said the economy needs to start generating 150,000 to
200,000 jobs per month “on a sustained basis.”
** Market News International **
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