A top Federal Reserve official said on Tuesday that he has yet to make up his mind whether further ease monetary policy is needed, despite a weakening U.S. economy and some risk of deflation.
Even with the risk of deflation, a vicious cycle of falling prices and weak economic activity, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said that given disagreements about the reasons behind the economic slowdown, the best policy prescription is not yet clear.
"There is growing sentiment that further accommodation through large asset purchases is coming," Lockhart told reporters after a speech at the University of the South, in Sewanee, Tennessee.
"For me, at this moment it's not a foregone conclusion that we need to go there."
Setting himself near the middle of the central bank's hawk-dove spectrum on the need to curb inflation, Lockhart indicated he is interested in hearing the arguments from both those who believe further accommodation should be forthcoming and those who think it might not be very effective, or even potentially detrimental.
Lockhart, a former banker who is not a voter this year on the Fed's policy-setting committee, said he believes the recent slowdown in the economy is temporary.
In response to the worst recession in generations, the Fed, in addition to slashing interest rates to near zero percent, bought some $1.7 trillion in government and mortgage-related bonds in an effort to bring down long-term rates and spur borrowing.
The move has achieved mixed success. The U.S. economy did begin to recover in the summer of 2009, but the pace of expansion slowed sharply to a 1.6 percent annualized pace in the 2010 second quarter.
"Growth at this anemic level is unlikely to generate enough new jobs to bring down unemployment to any significant degree," Lockhart said.
The jobless rate in August ticked up to 9.6 percent, as a modest spurt of hiring induced some discouraged workers to reenter the labor force. At the same time, underlying inflation has been running below the Fed's comfort level — a trend .
Against this backdrop, the Fed has been considering further action, indicating at its meeting last week that it was prepared to do more if the economy continues to sputter.
"The slowing of the economy in the middle of this year, combined with a very low measured rate of inflation, suggests to me the risk of deflation cannot be dismissed," Lockhart said.
Lockhart said his business contacts have told him that uncertainty, both about the economic outlook and government policies, has also contributed to a reluctance to make new investments and hire new workers.
Fed Board Governor Kevin Warsh touched upon a similar theme in remarks during a panel on the role of capital markets generating employment.
"Markets are normalizing if not normal, the economy is improving if not improved, and policies that come from the fiscal authorities, the trade authorities, the regulatory authorities need to be growth friendly," he said.
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