The Federal Reserve should not remove its pledge to keep interest rates ultra-low for an extended period until it is starting to move toward tighter monetary policy, a senior Fed official said on Monday.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, offered a lukewarm assessment of the U.S. economic recovery, which he deemed "fragile and tentative," as he commented on the Fed's commitment to low interest rates.
The U.S. central bank at its March policy-setting meeting reiterated that it will keep rates extraordinarily low for an extended period. But a more upbeat note on the U.S. labor market offered a hint that the Fed might be moving closer to dropping its promise to hold borrowing costs at rock-bottom level.
Lockhart on Monday cautioned against removing the "extended period" phrase too soon.
"I think the 'extended period' phrase has become enough of a focus of markets that we'd be ill-advised to change it until it's clear we are beginning to move towards tightening," Lockhart told reporters after giving a speech to the Naples Council of World Affairs.
Lockhart said the phrase "extended period" to him simply means "not imminent." That's in contrast to the president of the Chicago Fed, Charles Evans, for example, who has said it means "at least six months" to him.
The pledge has come under fire from some Fed policy makers. Kansas City Fed President Thomas Hoenig dissented at the two most recent policy meetings because he was uncomfortable with it.
James Bullard, president of the St. Louis Fed, told CNBC on Monday that the vow limits the central bank's policy flexibility. Bullard is a voter this year on the Fed's policy-setting panel, while Lockhart is not.
Asked if financial markets are getting ahead of themselves in pricing in a benchmark interest rate hike by the end of 2010, Lockhart said: "I wouldn't say that they are getting ahead of themselves in terms of the timing. Markets are constantly adjusting that anyway."
"My sense is that the market has pretty much understood the circumstances similar to the way I see them," he added.
Lockhart warned about the threats from a weak banking sector, which he said would continue to put a damper on lending and investment. And he highlighted the risk to global economic activity from uncertainty about the budget outlook of many advanced economies, including the United States.
He said high deficits could raise price expectations among consumers and investors, forcing policy makers to raise interest rates when the economy is still too weak to handle it.
"I am concerned about the possibility of a monetary policy dilemma developing," he said.
Lockhart pointed to Greece's budget crisis as holding lessons for the U.S. government.
"The Greek drama we're watching with such great interest should heighten recognition of the urgent need here in the United States for a credible path to fiscal sustainability."
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