–US Fiscal Policy, European Woes Complicate Monetary Policy
–Fed’s Evans: Fiscal Cliff Would Create ‘Very Big Headwinds’ For U.S.
–Fed’s Lockhart: Sees ‘Certain Amount of Fragility’ In U.S. Economy
By John Shaw
LOS ANGELES (MNI) – Chicago Federal Reserve Bank President Charles
Evans and Atlanta Federal Reserve Bank President Dennis Lockhart offered
differing views Tuesday on the future direction of monetary policy, but
agreed that the work of the central bank is being greatly complicated by
the uncertainty over American fiscal policy and the continuing economic
woes of Europe.
Speaking on a panel at the Milken Institute’s Global Conference and
in remarks at a joint briefing to reporters, Evans and Lockhart offered
different perspectives on monetary policy.
Evans said he is open to further monetary accommodation while
Lockhart said he would view that approach with great skepticism.
But both Fed presidents depicted a U.S. economy that has worked its
way through stormy seas, but still faces daunting challenges.
Evans said the Fed is carefully watching how policymakers in
Congress and the White House navigate the coming fiscal cliff at the
end of the year in which the Bush era tax cuts are set to expire and
deep spending cuts are set to be implemented.
He said he hopes “calmer heads prevail” and that Congress and the
White House find a way to avoid allowing sharply contractionary fiscal
policies from going forward in 2013, but also develop a credible
framework to tackle future budget deficits.
Sharp and immediate fiscal tightening would provide a “very big
headwind” for an economy that is already struggling to find its footing
and resume stronger growth, Evans said.
And while long-term deficit reduction is critical, “we don’t have
to deal with it immediately.” Evans suggested a deficit reduction
framework that is agreed to now and implemented gradually and in the
medium-term would be optimal.
“At the moment we need more accommodation for the entire economy,”
Evans said, adding that all policymakers are “frustrated” by the
stubbornly high unemployment rate.
The Fed should continue to seek to reach its 2% inflation target,
but Evans said he also is very concerned that unemployment that is still
greater than 8% is “way too high.”
“I think we can get the economy coming back” without having to
tolerate a strongly inflationary policy, Evans said. And the U.S. is
still “pretty far away” from strong, robust economic growth.
Evans said he is “not optimistic” that Europe’s economy will
strengthen in the near term.
Lockhart also depicted an American economy that is struggling. He
said he sees a “certain amount of fragility” in the economy, but added
that it is “too early to tell” if the slowing will continue.
Lockhart also said he is troubled by the uncertain, undisciplined
state of American fiscal policy.
“We have a fiscal imbalance in the economy that needs to be
addressed,” he said. The coming fiscal cliff poses a “downside risk” for
the economy, and it is imperative that policymakers develop a careful
and balanced “transition” to tighter fiscal policy.
“A lot of mojo will be taken out of the economy,” if the Bush tax
cuts are allowed to expire at the end of 2012 and deep spending cuts are
implemented in 2013, he said.
The Fed at some future time must “begin the process of normalizing
the balance sheet.” Failing to do so, Lockhart said, would be a mistake.
“That could affect inflation expectations.”
Fed policies should “always gravitate toward” the 2% inflation
target, but he added that there is a little — but not a great deal —
of flexibility to that target.
“I would be concerned if we were running 3% or higher,” Lockhart
said, adding “3% and above gets me very nervous.”
He also said the weakness of European economies is not helpful to
the U.S. economy, but he is less worried about how a faltering Europe
would affect the “real economy” in the U.S. than he is about its broader
psychological impact on financial markets and overall confidence.
** MNI Washington Bureau: (202) 371-2121 **
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