Federal Reserve Bank of Atlanta president Dennis Lockhart said while he’s supported the central bank’s open-ended bond purchases so far, further expansion of a record stimulus will complicate the
“Open-ended does not mean without bound,” Lockhart said in a speech in Atlanta. “I do think the growth of the Fed’s balance sheet could have longer-term consequences that are worrisome. While I’ve supported these policy decisions to date, I acknowledge legitimate concerns.”
The Atlanta Fed leader supported the Federal Open Market Committee decision in December to add $45 billion in Treasury purchases per month to the central bank’s mortgage-bond buying of $40 billion a month. Policy makers are discussing how long they will keep buying bonds as part of efforts to boost growth and bring down a 7.8% unemployment rate.
The Fed last month linked its interest-rate outlook to economic thresholds, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5% and if projected inflation won’t go beyond 2.5 percent one or two years in the future.
“There is a risk, given the Fed’s cumulative share of the Treasury and MBS markets, that at some point securities purchases could have adverse effects on market functioning and financial stability,” Lockhart said to the Rotary Club of Atlanta. In addition, as rates rise, “the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.”
Lockhart, giving his annual forecast, predicted “growth in the range of 2% to 2.5%” and said at the current pace of job creation, it could take “almost three years to reach an unemployment rate of 6.5 percent.”
The Atlanta Fed president spent much of his speech urging Congress and the president to take actions to give clarity to the outlook for U.S. fiscal policy. That would result in greater investment and hiring by business, he said.
“The tools of monetary policy remain at work in support of continued recovery and an acceleration of growth and hiring,” Lockhart said. “But monetary policy simply cannot offset the effects of failing to resolve today’s fiscal crisis.”
Lockhart has been overly optimistic in his forecasts made to the Atlanta Rotary in January in each of the past two years. He forecast 2.5% to 3% percent growth in 2012, while growth averaged 2.1% in the first three quarters. A year earlier, he forecast 2011 growth would exceed that of 2010, when instead the expansion lost steam.
The U.S. economy may expand at a 2% pace in 2013 after a 2.3% gain last year, according to the median forecast of economists surveyed by Bloomberg News this month.
Lockhart, who has never dissented from an FOMC decision, doesn’t vote on the policy-making body this year. A former Georgetown University professor, Lockhart has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi and Tennessee.
