The U.S. economy remains too fragile for the Federal Reserve to begin raising interest rates, the president of the Atlanta Fed, Dennis Lockhart, said on Wednesday.
Lockhart reiterated that the Fed will complete its $600 billion bond-buying plan as scheduled at the end of June, adding that he not seen sufficiently compelling evidence to cut the program short.
Asked about hints from minutes of the Fed's last policy meeting that some of his colleagues had started to think about hiking interest rates before the end of this year, Lockhart said at the moment he was not inclined to think that would be needed.
"There is still a degree of fragility in how this recovery is evolving," Lockhart, who was in Stone Mountain, Georgia, for a conference of the Atlanta Fed, told reporters. "I just don't think it is yet the right time to reverse course."
The U.S. economy expanded 3.1 percent in the fourth quarter. Unemployment has come down rapidly in recent months but remains at an elevated 8.8 percent.
Lockhart said inflation was still not a major concern and argued that the recent uptick in prices was actually a desired outcome for policymakers, many of whom had been worried about the potential for a deflationary spiral late last year.
Echoing the message of Fed Chairman Ben Bernanke, Lockhart argued the recent spike in commodity prices was due to supply and demand factors rather than the Fed's loose monetary policy. Many emerging market policymakers have criticized the Fed for fueling rapid capital inflows into emerging market securities and currencies.
Lockhart said he expects commodity prices to stabilize, and underlying inflation trends to remain subdued.
"The core numbers are still somewhat below what I think is the informal target that the consensus of the committee of around 2 percent," Lockhart said, referring to closely watched readings of inflation that exclude food and energy prices.
"Inflation expectations short term are reflecting gasoline price movements and have risen somewhat," he added. "But longer term they're more stable and in a zone that I think is reasonably healthy."
Crude oil prices this week hit 2-1/2-year highs, and U.S. corn futures hit record highs.
Lockhart said he had not yet sketched out an exact vision of how he would like the U.S. central bank to exit its loose monetary policy, but said the Fed would consider a rather aggressive exit strategy proposal by Philadelphia Fed President Charles Plosser "very seriously."
One step central bank officials could eventually take, Lockhart said, might be to no longer reinvest the proceeds of maturing mortgage bonds back into Treasury securities, as is currently the case.
"We have the option to employ some passive shrinking of the balance sheet for some period of time," Lockhart said. "I think it's possible that passive shrinking might be associated with something you might call a kind of pause in which interest rates would remain low while some shrinking of the balance sheet takes place."
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