WASHINGTON (MNI) – The following is the first of part of excerpts
from prepared remarks by Atlanta Federal Reserve Bank President Dennis
Lockhart Tuesday night to the Alabama World Affairs Council:

In my opinion, the decision to purchase additional Treasury
securities was not made in a black-and-white world. It was a policy
decision made under considerable uncertainty-involving judgments in gray
areas requiring sober weighing and careful weighting of risks and
rewards, costs and benefits. Well-informed and rigorous thinking could
lead one to come down on either side of this decision. In my view, every
policy option before us had the potential of bringing serious challenges
down the road that policymakers would later have to tackle. There were
no riskless options.

The FOMC’s decision to purchase additional assets has been
controversial both here in the United States and abroad. As is often the
case in controversial policy matters, there are varying
characterizations of decision makers’ intent and even different
interpretations of key terms and concepts. Tonight I would like to give
you my perspective on potential misunderstandings as I address the
following four views that critics of the policy seem to hold: (1) The
Fed is monetizing the federal debt; (2) the Fed is purposefully
devaluing the dollar; (3) the policy is unconventional, with unknown
risks, and may create serious unwanted inflation; and finally (4) this
additional easing simply won’t work.

Monetizing federal debt

Let me first address the issue of debt monetization, a practice
that historically has resulted in higher inflation and, as a result,
loss of wealth and savings by those who hold government bonds.

A policy of monetizing debt would be most properly understood as a
policy in which the Fed ties its purchases to new Treasury debt issues.
The intent would be to enable the government to finance near-term
deficits and/or eventually inflate away some of the nominal value of
government debt. This is not the objective.

In my view, the current policy is resolutely designed to support
the expansion of the economy and to maintain inflation near the FOMC’s
desired objective for price stability. I have every confidence the
policy will revert to reducing the size of the Fed’s holdings as those
conditions are met.

I feel it is particularly important for you, the public, to
understand that the FOMC’s purchase program is conditional and will be
evaluated in light of developing economic conditions. When conditions
warrant, these purchase operations will cease, and eventually sales will
be instituted. And I am confident these decisions will be made
independent of fiscal considerations.

Dollar devaluation

It has also been argued that the Fed’s asset purchases have the
intent-and also the effect-of devaluing the dollar. Ordinarily in my
remarks I would defer to the U.S. Treasury Department on matters related
to the dollar. That said, I don’t think it is out of line to state
clearly that, as I see it, there is no monetary policy intent to
engineer specific values-or even a direction-for the dollar. In other
words, this policy was not undertaken to prompt dollar depreciation.

Prices of many types of assets are affected by monetary policy
actions. The monetary transmission mechanism works by altering the
relative price of various assets. The effectiveness of the policy will
not hinge on dollar depreciation and, therefore, the price of the dollar
in foreign exchange markets.

For those concerned about the dollar’s value I believe it is
important to stress that the most critical factor in maintaining the
dollar’s value is a strong economy with stable inflation. It is
certainly true that the short-term effect of recent policy has put
downward pressure on the dollar. But the purpose of the policy is to
strengthen the U.S. economy, which is in the world’s interest.

Serious unwanted inflation and other risks

A number of people have raised a third concern, namely, that this
approach is new and unconventional and is fraught with risks that are
going to harm the economy over the longer term.

True, a large-scale asset purchase program is an unfamiliar policy
in the sense that we are not targeting the federal funds rate. And I
acknowledge there is uncertainty associated with this policy action as
compared with fed funds rate targeting. Much of that uncertainty
revolves around scale and lags-how large do the purchases need to be to
have a noticeable effect? And how quickly will we discern that effect?
In my mind, the perceived risks-particularly the risk of overshooting
inflation-must be weighed against the risks that could be associated
with a policy of inaction. Chief among those risks is a recessionary
relapse possibly tipping into a long spell of deflation. Through the
summer there were some signs of renewed disinflation, which could lead
to deflationary expectations taking hold.

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

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