By Steven K. Beckner
(MNI) – Atlanta Federal Reserve Bank President Dennis Lockhart
deplored the weakness of the U.S. economy Wednesday, but suggested that
it would take even worse economic conditions for him to back further
monetary stimulus measures.
Lockhart, who is generally regarded as a mainstream Fed official,
said more easing “might be called for” if “more adverse scenarios” are
realized, but said he is now “comfortable” with the Fed’s current
“accommodative” stance.
He said no option can be ruled out, but said monetary policy is
“not a panacea.” Going further, he warned that pushing the monetary
envelope too far could backfire by producing new “imbalances” and
“distortions” in remarks prepared for delivery to the Lafayette,
Louisiana Chamber of Commerce.
Lockhart, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, made his cautious remarks about
what more the Fed should do even while making strongly negative comments
about the economy and while saying it will take years of “adjustments”
and “deleveraging” to restore prosperity.
He began by saying “the country is in the ninth quarter of a
disappointing and frustrating recovery.”
Contrasting GDP growth of 1.6% over the past four quarters to a
2.5% estimated “potential” growth rate, he said, “slack in our economy
is rising even though we are technically in recovery.
Lockhart said that neither “structural” nor “temporary” forces
fully explain the slump.
“Over the past few quarters, the recovery has lost dynamism, and
downside risks to growth have risen notably,” he said.
And he said “with the incoming data of the last few weeks-awareness
of and attention to the deeper long-term impediments to growth have
become more acute.”
Lockhart said “slow improvement in the labor market has been
particularly disappointing.”
“Job growth remains too low to bring down the unemployment rate,
which remains above 9%,” he said. “People in all age groups continue to
leave the labor force, and the employment-to-population ratio is now at
its lowest level in over 25 years.”
Over time, the nation will have to undergo three types of
adjustment, according to Lockhart: “1) deleveraging (that is, the
reduction of total debt levels in our economy), 2) fiscal adjustment,
and 3) financial system repair.”
He devoted much of his speech to deleveraging.
“Declining home values along with rising unemployment set in motion
a process of deleveraging by the household sector.” he said.
“In contrast to reductions in debt by households and businesses,
government debt has surged, increasing from about 50% of GDP prior to
the recession to around 80% in the first quarter of this year,” he
noted. “While the private sector-households and businesses-has made
notable progress in lowering its debt burden, discussions of how to
reduce public debt have only just begun.”
Lockhart said “the government still needs to introduce major policy
changes to put public debt on a sustainable path.”
He said the necessary process of deleveraging “may take several
more years,” which will in turn slow consumption and the rate of decline
in unemployment.
Tackling the question of what role monetary policy can play in this
ongoing process, Lockhart proceeded cautiously.
“To my mind, it’s becoming increasingly clear the challenge we
policymakers face is balancing appropriate policy responses for the near
to medium term with what’s needed for the longer term,” he said.
“In other words, we must continue to help the economy achieve a
healthy enough cyclical recovery, especially with unemployment high and
consumer spending lackluster,” he continued. “At the same time, we must
recognize the longer-term need for directionally opposite structural
adjustments, including deleveraging.”
Already, Lockhart said, the Fed is supporting the recovery by
providing “low interest rates and ample liquidity.”
But “at the same time, there’s broad acknowledgement that policy
must support the long-term rebalancing required to sustain our economic
health,” he said. “Finding the right path through these seemingly
conflicting pressures is challenging.”
Lockhart described the current stance of monetary policy as
“accommodative,” noting that the FOMC at its Aug. 9 meeting stated “the
intention to keep the policy rate at near zero for two more years” and
that it is continuing to “maintain the Fed’s balance sheet scale for the
foreseeable future.”
“I support this position,” he added.
But he was noncommittal about future easing, in contrast to Chicago
Fed President Charles Evans who has bluntly said he favors more
accommodation.
“Given the weak data we’ve seen recently and considering the rising
concern about chronic slow growth or worse, I don’t think any policy
option can be ruled out at the moment” Lockhart said. “However, it is
important that monetary policy not be seen as a panacea.”
“The kinds of structural adjustments I’ve been discussing today
take time, and I am acutely aware that pushing beyond what monetary
policy can plausibly deliver runs the risk of creating new distortions
and imbalances,” he said.
“We may find, as economic circumstances evolve, that policy
adjustments are required,” he went on. “In more adverse scenarios,
further policy accommodation might be called for.”
“But as of today, I am comfortable with the current stance of
policy, especially considering the tensions policy must navigate between
the short and long term and between recovery and the need for
longer-term structural adjustments,” Lockhart added.
** Market News International **
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