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Lockhart Says Fed Balance Sheet Expansion Raises Concern

January 14, 2013

Fed’s Lockhart Says Expansion of Balance Sheet Raises Concern

Federal Reserve Bank of Atlanta President Dennis Lockhart, giving his annual forecast, predicted “growth in the range of 2 to 2.5 percent” and said at the current pace of job creation, it could take “almost three years to reach an unemployment rate of 6.5 percent.” Photographer: Patrick Fallon/Bloomberg

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 could complicate the eventual shrinking of the balance sheet.

“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 percent 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 percent and if projected inflation won’t go beyond 2.5 percent one or two years in the future.

Adverse Effects

“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 told reporters after his speech he didn’t see any new threats to financial stability, though “there has been some discussion” by other Fed officials of surging farmland prices.

“On my radar screen I see no immediate threats,” he said. “The concern I expressed in my speech is admittedly a more abstract one and a more visceral one. It is longer term. That is, how far can you take the balance sheet before you invite problems that are hard to pinpoint today?”

Lockhart, giving his annual forecast, predicted “growth in the range of 2 to 2.5 percent” and said at the current pace of job creation, it could take “almost three years to reach an unemployment rate of 6.5 percent.”

Inflation Target

The Atlanta Fed chief told reporters he expects inflation “a little below the FOMC’s target” of 2 percent this year. “I do think we will make some progress” in lowering the unemployment rate, he said.

The housing sector will “continue to improve” this year and rising prices have bolstered confidence, Lockhart told his audience in response to questions. “The auto industry will continue to have a good year” because of an aging fleet of cars that must be replaced over time, he said.

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 percent to 3.0 percent growth in 2012, while growth averaged 2.1 percent in the first three quarters. A year earlier, he forecast 2011 growth would exceed that of 2010, when instead the expansion lost steam.

U.S. Economy

The U.S. economy may expand at a 2 percent pace in 2013 after a 2.3 percent 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.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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