Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank shouldn’t rule out asset purchases beyond the $600 billion planned by June because turmoil in the Middle East risks causing a slowdown in the U.S.
“With the information I have today, my first inclination is to be very cautious about extending asset purchases after June,” Lockhart said today in a speech in Arlington, Virginia. “Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options.”
Lockhart’s comments echoed Fed Chairman Ben S. Bernanke, who told Congress last week that economic conditions continue to justify holding the central bank’s target rate at near zero as well as additional monetary stimulus. Private economists are projecting the Fed will start to raise interest rates by early 2012 as the economy strengthens.
The Atlanta Fed president told reporters after his speech that a third round of large-scale asset purchases could be needed in the event of another downturn.
“How would we ease?” he said. “Well, we are using asset purchase tools as opposed to interest rates. As I explained in the speech earlier, they have a functional equivalence” in their impact on markets. “That would be to me the logical thing, LSAP3, or something like that.”
“I want to remain open to whatever has to be done or needs to be done at a given time.”
Turmoil in the Middle East and North Africa has the potential to create another oil price shock, Lockhart told reporters after his speech. A former commercial banker who had worked previously in Iran, Lebanon, Saudi Arabia and Greece, Lockhart said a wide range of outcomes are possible.
While the U.S. economy can absorb a “moderate increase” in oil prices, a bigger increase sustained over a longer period could do damage, Lockhart said. Research shows a “high correlation” between oil price shocks and recessions, Lockhart said.
“I don’t have extraordinary certainly that this is a temporary or a minor kind of effect,” Lockhart said. “We cannot rule out there would be a higher run-up of energy prices. Having said that, it is certainly not my base case scenario for the economy.”
Lockhart said higher oil prices were among the factors that could weigh on businesses as they consider hiring and new investments, adding he was heartened by recent signs that businesses are adding to payrolls again.
Jobs Report ‘Encouraging’
“Friday’s jobs report was encouraging, particularly considering that the January report had so much noise,” Lockhart said to National Association for Business Economics’ annual economic policy conference in Arlington, Virginia. “But, in my opinion, it is premature to declare a jobs recovery firmly established” and “achieving something close to full employment will take some time.”
Employers in the U.S. added 192,000 workers in February amid an improving economy. The unemployment rate unexpectedly declined to 8.9 percent, the lowest level since April 2009, figures from the Labor Department showed last week.
A survey of economists released today by NABE found 71 percent expect the Fed to raise its target interest rate over the next year. Thirty percent expect the Fed to raise interest rates by 26-50 basis points, while 17 percent believe that monetary policy makers will boost rates by 25 basis points or less. A basis point is 0.01 percentage point.
Lockhart repeated his forecast for growth of 3 percent to 4 percent, inflation firming to around 2 percent, and gradual employment growth.
The Atlanta Fed chief also said that cutbacks at the federal and state government level are already factored into his forecast. The U.S. must ensure it keeps its top credit rating, he said.
“We should not assume things have historically been viewed as unthinkable are not possible,” Lockhart said in response to audience questions. “We have to ensure” that U.S. Treasurys remain “the Triple A asset that it is.”
Lockhart, 64, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy with Lockhart next voting in 2012.
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