Atlanta Fed chief says bank may need to do more

By Jeff Amy/The Associated Press

JACKSON — Dennis Lockhart, president of the Federal Reserve Bank in Atlanta, says the Fed should act to further stimulate growth if the economy doesn’t improve by year’s end.

But speaking Friday to the Mississippi Economic Council, Lockhart said he supports no further Fed action if employment growth shows improvement in the next six months. If it doesn’t, he said, the Fed’s current policy will become “untenable.”

Lockhart said he could support more efforts to stimulate the economy by loosening credit. However, he said he’s unsure how much fruit that strategy would bear.

“I do not think monetary policy is impotent or has reached its limit,” Lockhart said. “But I don’t see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank’s purview.”

Lockhart’s view is crucial because he’s one of the Federal Reserve governors who currently votes on monetary policy such as setting interest rates or buying bonds. His occasional public speeches are sifted carefully by bankers and traders for hints on future Fed actions. The Fed’s Open Monetary Committee next meets July 31 and Aug. 1. Some forecasters see a chance of a third round of bond buying, called quantitative easing.

Lockhart said he is “a little bit more on the fence at this point” about the need for action. Lockhart said “my receptivity has increased a bit” since the Fed’s June meeting, because of worsening economic reports.

“What will it take?” he told a questioner in the audience. “It will take some more bad news.”

Lockhart said he was willing for the Fed to consider buying mortgage-backed securities rather than government debt in a third round of quantitative easing. He said purchasing housing debt could push mortgage rates below already low levels, enticing more home buyers. That could re-employ construction workers and increase demand for everything that goes into a house.

In Mississippi, for example, that could mean some lumber mills and furniture factories might reopen or increase hiring.

The Fed has already pledged to keep interest rates at near-zero levels through the end of 2014, which Lockhart said he’s “very confident” will be fulfilled. The bank also voted in June to continue selling short-term Treasury bonds and buying long-term bonds, in an effort to drive down long-term interest rates known as Operation Twist. The bank has also injected $2.3 trillion into the economy in prior rounds of bond buying.

Lockhart said he believes the economy is performing below its potential, although the gap between current output and the best possible performance is not as big as some believe. But he said that current levels of unemployment should not be viewed as normal.

“Elevated levels of joblessness have been very persistent and the burdens of the very weak job market have been particularly harsh for the segments of our population where job attachment is already most tenuous — the young, minorities and those at lower income levels,” Lockhart said.

He said he believed the Fed could take further action without causing inflation to kick up too high. However, Lockhart said he’s concerned that a drought gripping much of the country could cause food prices to rise.

By law, the Fed is supposed to balance full employment with containing inflation.

Lockhart has been president of the Atlanta bank since 2007. It covers all of Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee.

“The Southeast is lagging the national trends,” he said. “Unemployment is a little bit higher than the national numbers, (economic) growth is a little bit lower than the pace everyone would like.”

Lockhart said a main reason for the region’s lower performance is fallout from the housing bust.

Over the longer term, he said Southeast continues to build strength in the factory sector, citing auto plants and the announcement that Airbus will assemble planes in Mobile, Ala.

“In many respects, the Southeast is becoming the center of manufacturing in the country,” Lockhart said.

However, he said that the Fed’s power is limited to lifting the economy in Mississippi, which slipped back into recession in 2011 according to federal figures. Employment growth has continued to lag in 2012, suggesting Mississippi’s economy is at best treading water.

Monetary policy “is a large blunt instrument that can only deal at a macro level,” Lockhart said. “We don’t have the ability to target outcomes for particular groups.”