Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank may need to begin a new program of asset purchases if recent economic weakness continues and undermines his forecast for a pickup in the second half of the year.
“If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it.” Lockhart said in remarks prepared for delivery in Jackson, Mississippi. “My support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013.”
The policy-making Federal Open Market Committee voted last month to extend its maturity extension program, known as Operation Twist, to provide more support for a slowing U.S. economy and said it would consider additional stimulus if needed.
“My colleagues and I on the FOMC may confront a decision on whether or not to respond more aggressively to the economy’s apparent weakness,” Lockhart told the Mississippi Economic Council. “It’s possible another policy decision looms.”
Just 80,000 U.S. jobs were added in June and the jobless rate stayed at 8.2 percent, the U.S. Labor Department reported July 6. Growth in private payrolls was the weakest in 10 months. The figures underscore concern among some Fed policy makers that growth isn’t fast enough to lower unemployment stuck above 8 percent since February 2009.
Lockhart said he downgraded his economic forecasts prior to the latest FOMC meeting in response to weakness in the first half of the year.
The Atlanta Fed president said asset purchases and expansion of the balance sheet are not a “miracle cure” yet are still effective. “I think we should have modest expectations about what further action can accomplish,” Lockhart said.
“In my judgment, some further use of the balance sheet to promote continued recovery and/or financial stability brings with it manageable risks,” he said. “I think reversal of the cumulative balance sheet scale and maturity structure can be accomplished in an orderly manner. But the step of additional balance sheet expansion should be undertaken very judiciously. Such a step would take us further into uncharted territory.”
Lockhart also said he viewed most of the weakness in the labor market as resulting from weak demand rather than structural factors such as a mismatch of job skills with openings.
Federal Reserve Bank of San Francisco President John Williams said July 9 that the central bank should maintain “extraordinary vigilance” and the most effective policy tool would be more asset purchases including mortgage-backed securities.
Lockhart, who votes on monetary policy this year, has never dissented from an FOMC decision. He told a Florida audience that extending Operation Twist was “an option on the table” two weeks before the FOMC chose that course.
Lockhart, 65, 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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