Federal Reserve Bank of Atlanta President Dennis Lockhart said he wants to continue central bank asset purchases through the end of this year to help improve the job market.
“Considering current labor market conditions, I think continuing the asset purchase program to support the recovery and to improve employment conditions remains appropriate for now,” Lockhart said today in prepared remarks in Knoxville, Tennessee. “Given the outlook and associated risks, I am comfortable with sticking with the current approach at least into the second half of the year.”
Lockhart supported the Federal Open Market Committee on Jan. 30 to continue $85 billion in monthly bond buying. Several participants “emphasized that the committee should be prepared to vary the pace of asset purchases” in reaction to changes in the economic outlook, according to meeting minutes released last week.
“I would support completing a program that goes through the end of the year,” Lockhart told reporters after his speech at the University of Tennessee. “The employment situation justifies trying to continue” monetary stimulus. “In some form I think we can justify going through year end.”
Slowing purchases as the employment market improves is an option worth studying, Lockhart said.
“Certainly the notion of tapering it off and reducing the overall scale of purchases could very well be consistent” with his view of keeping the program to year end, the Atlanta Fed chief told reporters. “The idea of tapering is certainly under consideration and in the air” in “terms of public commentary and I think it is a legitimate thing for the committee to consider.”
St. Louis Fed President James Bullard has proposed varying monthly purchases, an idea also endorsed by Dallas Fed President Richard Fisher. The central bank, seeking to stoke growth and bring down 7.9 percent unemployment, has expanded its balance sheet to a record exceeding $3 trillion.
Lockhart also told reporters he was watching the possibility of asset imbalances.
“Certainly there is a strong search for yield going on,” he said. “Money has been channeled to certain asset classes,” such as real estate investment trusts. “I am not prepared to say there are true bubble asset classes that have developed. But I do think we have to continue to be attentive to market developments.”
In his prepared text, Lockhart said benefits from asset purchases outweigh potential risks.
“I do not think that monetary policy has yet crossed the line where the benefits of the current policy -- specifically the quantitative easing element -- are swamped by serious concerns over problems the policy might be creating for the longer term,” Lockhart said.
The U.S. economy is likely to grow about 2 percent in the first quarter and 2 percent and 2.5 percent this year, supported by a recovery in housing and strength in the auto industry, Lockhart said. While the risks from the European debt crisis have decreased in recent months, fiscal tightening in the U.S. continues to be a concern, he said.
“This pace of growth implies steady, but not accelerating, net job creation,” Lockhart said. “At this pace of expansion, unemployment will likely continue to decline gradually.”
One positive is that leading indicators for the employment market, including initial claims for unemployment benefits and demand for temporary help services, seem to be improving, he said.
“I take some encouragement from how much progress has been made in those areas,” he told reporters. “It suggests there is some momentum, but it is uneven momentum.”
For those “working part-time for economic reasons” and those who are “marginally attached” to the labor force, little improvement has been made, he said.
Inflation has been running below the Fed’s goal of 2 percent and sometimes approaching 1 percent, the Atlanta Fed chief said.
“To significantly and persistently undershoot the central bank’s inflation target could be worrisome in some circumstances, but, at this point, I think the inflation outlook is benign,” he said.
The Fed last month said inflation has been “somewhat below” its long-run target of 2 percent. An index of inflation tied to spending patterns rose 1.3 percent in the year ended in December.
The FOMC decision last month came after the economy shrank 0.1 percent during the fourth quarter. The Fed in December 2008 cut the main interest rate close to zero to bring down borrowing costs and fuel economic growth.
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.
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