–Updating Story Published 14:26 ET; More Quotes, Details

By Steven K. Beckner

ATLANTA (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart said Monday that he is skeptical about whether or not a third
round of quantitative easing would help the economy, but said he’s open
minded on the subject.

Lockhart, who will be voting on the Fed’s policymaking Federal Open
Market Committee this year, defended the Fed’s recent foray into
housing policy.

“I harbor some skepticism whether a new round of quantitative
easing would be highly effective,” Lockhart told reporters, but added,
“I am not foreclosing that as an option.”

“I’m keeping my mind open to that,” he continued, but “it will
depend on conditions as it always does.”

A White Paper released by the Fed last week explored a number of
policy options to address the depressed housing market, including making
it easier for people to refinance their homes and converting foreclosed
properties to rental units.

“I don’t view that as over-stepping our bounds,” he said, adding,
“In a way, we are communicating that there is not a monetary policy fix
per se.”

“I think it’s very normal to study significant problems, whether
we study at the macro or micro level,” he said. “It’s perfectly
appropriate to do that.”

Regarding the FOMC’s plan to begin including members’ federal funds
rate in the Committee’s quarterly Summary of Economic Projections,
starting this month, Lockhart said the FOMC cannot set monetary policy
“in anticipation of what (the market’s) reaction would be.”

“We have to set policy in the interest of the economy,” he said.
“As always the market will sort that out.”

Some have surmised that the funds rate forecasts, in sum, could
project an earlier hike in the funds rate than the market now expects.
But Lockhart said, “the intention is not to consciously tighten policy.”

On the contrary, in earlier response to an audience question,
Lockhart emphasized “the importance of Federal Reserve communication,
particularly in a period when interest rates are essentially low as they
can go, or the policy rate is as low as it can go.”

“Good communication can be a form of stimulus,” he said. “It can
help people plan, help people make decisions” and “help gain the
confidence the economy needs.”

Lockhart acknowledged that “it’s a lot about psychology, but we
need a better psychology in the economy … more confidence to make
decisions to hire and invest and spend.”

Lockhart was vague about what, if any, guidance the FOMC will
provide on the size of the Fed’s balance sheet in forthcoming SEPs.

Lockhart called Friday’s December employment report was
“encouraging,” but pointing to the large number of discouraged and
part-time workers, he said “we’ve got a lot of work yet to do.”

The Labor Department reported a drop in the unemployment rate to
8.5%, along with a 200,000 rise in non-farm payrolls, and “all of that
is encouraging,” he said. “but it’s not enough to really substantially
bring down the employment rate.”

He estimated that there are 20 million people who are either
unemployed, in temporary jobs or too discouraged to look for work.

Lockhart downplayed the risk of excessive disinflation, saying he
does not think the economy is in the situation that it was in November
2010 when the FOMC launched a second round of quantitative easing to
counter that risk. But he added, “we’ve got to watch it.”

After warning of the danger of the mounting federal debt in his
luncheon speech to the Atlanta Rotary Club, Lockhart was asked whether
he thinks the U.S. is on the path to a European-style debt crisis. He
replied that the U.S. has time to deal with its debt issues, provided it
develops a “credible” long-term plan.

He said the U.S. benefits from the fact that “the dollar remains
the most significant reserve currency in world. Though the dolllar has
lost a little bit of ground, it is still by far largest reserve
currency.”

“Consequently the willingness of world to hold dollars, invest in
treasuries and other assets seem to be sustained for some time,” he
said. “If anything the safe haven role of the dollar has strengthened
the dollar’s role.”

In other comments, he reiterated his concern about Europe — not so
much the direct impact that a European recession might have on U.S.
exports but the threat of financial spillovers.

He said he is “pretty confident that China is doing a good job
of engineering a soft landing.”

Answering an audience question about housing, Lockhart said “the
housing sector is still in a depressed state,” despite “some pick-up in
forward looking sales contracts, pickup in residential construction”
and some decline in delinquencies and foreclosures.

“There are some positive signs that are encouraging,” he said.

He estimated that the “full employment” rate of unemployment is
5.5% to 6.0%. Relative to the prevailing rate, he said, “we still have
a lot of work to do.”

** Market News International **

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