Federal Reserve Bank of Atlanta President Dennis Lockhart said aggressive central bank policies will remain needed to spur job growth even if Congress averts sudden tax increases and spending cuts at the end of the year.
“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 Friday in Charlottesville, Virginia. Fed easing isn’t aimed at “abetting” fiscal policy by reducing the cost of financing the federal deficit, he said.
The Atlanta Fed chief voted with the Federal Open Market Committee in October to continue buying $40 billion in mortgage bonds each month until the labor market improves “substantially.” The central bank is also purchasing $45 billion of longer-term Treasurys in a securities-swap program called Operation Twist scheduled to end in December.
“I am not prepared to say we are remotely close to substantial improvement on the employment front,” Lockhart said in a speech to the University of Virginia Investing Conference.
Chairman Ben S. Bernanke has said the economy is vulnerable to the so-called fiscal cliff, the more than $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. The Congressional Budget Office said in an Aug. 22 economic report that fiscal tightening of that magnitude could cause a recession.
Failure to avert the fiscal cliff may create “new challenges to monetary policy and an uncomfortable tension between monetary policy and fiscal policy,” Lockhart said in his speech. In response to an audience question, he said, “there is no direct link in terms of intention between the low-interest rate policy and the financing of the deficit.”
Even with a resolution of fiscal challenges, the labor market would warrant further stimulus, Lockhart said.
“There is still a disproportionate share of part-time jobs reflected in the overall employment gains, long-term unemployment remains unacceptably high,” Lockhart said. “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.”
Under the Operation Twist program, the Fed is buying about $45 billion a month of longer-term securities to replace the same amount of short-term securities that are maturing or being sold.
“A decision will have to be made as to whether to replace it by another round of Treasury securities purchases,” Lockhart said, without saying if he supports such a move.
Fed officials are also debating whether or not to tie their low-interest rate policies to economic thresholds such as a certain unemployment rate or level for inflation.
“The health of the labor market is more complex than a single number like the unemployment rate can convey,” Lockhart said.
“As with any assessment of the economy, I think it will be appropriate to take a ‘dashboard’ approach to get a full picture of prevailing conditions,” he said, echoing remarks in a speech earlier this month.
Lockhart, a former Georgetown University professor, has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.
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