-Can’t Say Remotely Close To Substantial Employment Improvement
-Use Of Balance Sheet Tools Justified Even If Fiscal Cliff Averted
-Warns Lawmakers Against Any Action That Compromises Econ Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – Atlanta Federal Reserve Bank President Dennis Lockhart
Friday said the central bank’s aggressive use of its balance sheet to speed up
the economic recovery will remain appropriate “for some time,” even if lawmakers
are successful in addressing the threat of the looming fiscal cliff, due to a
growth rate that is still not up to speed.

And on the subject of the approaching deadline of expiring tax reliefs and
spending cuts, Lokchart had a stark warning for the administration and Congress
— “if the fiscal cliff is mishandled, the economic outcome could be a

In remarks prepared for a conference at the University of Virginia in
Charlottesville, Lockhart said he remains comfortable with the path chosen by
the Federal Open Market Committee, the Fed’s policymaking body.

“I expect that continued aggressive use of balance sheet monetary tools
will be appropriate and justified by economic conditions for some time even if
fiscal cliff issues are properly addressed,” Lockhart said. He is a voter on the
FOMC this year.

He noted that despite some signs of firming in the overall U.S. economy, he
retains a base outlook in which real growth is only modestly above a 2% growth

The FOMC has vowed to keep its accommodative policy in place until it sees
sustained improvement in the labor market, and Lockhart said that recent jobs
numbers have been encouraging.

However, “I am not prepared to say we are remotely close to substantial
improvement on the employment front,” he said.

He noted that there is still a disproportionate share of part-time jobs
reflected in the overall employment gains, long-term unemployment remains
“unacceptably high,” labor force participation rates are still surprisingly low,
and initial unemployment gains have not yet fallen to levels that seem
consistent with a truly robust jobs picture.

As a result, “I think that monetary policy is appropriately calibrated to
give the U.S. economy its best shot at ongoing, or even accelerating, growth,”
he said.

Lockhart stressed that monetary policy is not yet at its limit but is very
accommodative at this time, describing it as “well out there on a spectrum
measuring degrees of accommodation.”

Lockhart’s support for current monetary policy is also likely bolstered by
the signs of life he is seeing in the housing market — from sales to inventory
levels and prices.

“These trends give me some confidence that a sustainable recovery in this
crucial sector is under way,” Lockhart said, adding, “This improvement in turn
reinforces my confidence that our policy actions to support this recovery will
be effective.”

With regard to the fiscal cliff, Lockhart cautioned lawmakers against any
actions that would compromise the progress of the recovery, as the continued
effectiveness of current monetary policy requires no interruption to the

“The length and persistence of the FOMC’s asset purchase program, and hence
the ultimate size of the Fed’s balance sheet, depend critically on the pace of
economic recovery,” he said, adding, “Any approach that compromises the
continuation of the economic recovery will be, in my view, very damaging.”

Both sides must find a way to avoid the fiscal cliff or risk very serious
consequences for the economy.

Putting it in blunt terms, Lockhart said that, “the near-term economic
risks presented by failure to deal effectively with the fiscal measures
collectively referred to as the fiscal cliff are so serious that to sidestep
this concern feels like trying to whistle past the graveyard.”

There is a real risk of a disturbance in the financial markets if lawmakers
do not resolve the issue properly, he warned.

Coming back to his outlook for the economy, Lockhart noted that the current
pace of U.S. economic growth is gravitating around 2%, and said this may be
close to the economy’s long-run potential growth rate.

“This sluggish pace of growth implies vulnerability to shocks and
stall-out,” he said.

Inflation, on the other hand, should remain moderate and close to the
FOMC’s explicit 2% target he added.

As for the aforementioned positive signs of some firming of economic
conditions, Lockhart pointed to the uptick in manufacturing activity as
signified by the Institute of Supply Management October index.

On the consumer front he noted that spending continues to grow and
sentiment regarding future conditions is improving.

** MNI Washington Bureau: 202-371-2121 **

–email: besene@mni-news.com