Fed's Lockhart: Nearing Point Where 'Downward Adjustment' Appropriate

WASHINGTON — The U.S. economy is gradually improving and approaching a point where a "downward adjustment" to the Federal Reserve's accommodative monetary policy would be appropriate, Atlanta Federal Reserve President Dennis Lockhart said Monday.

"That's not to say the June meeting, but we are approaching a period in which it can be seriously considered based upon sort of the momentum of the economy which is not great but nonetheless is moving forward and based upon accrediting confidence in the economy," Lockhart told the Fox Business Network.

"We've been trying to position this as a flexible policy that can be calibrated to conditions," he added.

Lockhart said "there's certainly a case" that it is still premature for a downward adjustment or tapering of the Federal Reserve's monthly asset purchases but said "I think it's a meeting-by-meeting kind of thing."

The U.S. economy has added on average, close to 200,000 jobs per month over the last four months and the unemployment rate has come down four-tenths of a percent. However, inflation remains tepid, below 1.5% by Lockhart's estimation, and said that if the U.S. were to move from a period of disinflation to deflation it could be appropriate for the Federal Reserve to take additional actions.

"We are in a period in which the inflation numbers are soft and there's a scenario in which if they continue to soften we have a different kind of problem to deal with," Lockhart said. "I think the key thing to watch is inflation expectations."

But he added that the jobs numbers and unemployment rate are the most "prominent" indicators to take into account when gauging the health of the economy.

"I expect that we will see this kind of moderate pace of job creation in the 160-175 (thousand a month) range," Lockhart said, adding that anything above that would be "encouraging" and anything below "would certainly give me a little pause about whether we have enough momentum going to consider an adjustment to the asset purchases."

The Bureau of Labor Statistics is currently preparing for the Friday release of the monthly employment report for May and the forecasts of 30 analysts and economists surveyed by MNI has centered on 167,000 jobs added for the month and an unemployment rate of 7.5%.

When asked if he was concerned about a possible "summer swoon" Lockhart said "the employment numbers did weaken more or less in the middle of the year for the last three years," but added, "I would be somewhat more concerned about a slowing of the pace of job creation and slowing of momentum in the employment markets."

Lockhart also said that the Fed will continue to keep a close eye on the impact its monthly asset purchases has on the markets.

"It's certainly an important question, both as we continue some amount of asset purchases and then at some stage, which is down the road, the true unwinding of the total policy," Lockhart said adding "I don't think we're crossing any thresholds that would really distort the markets, but it's something we have to keep an eye on."

Lockhart said he expects the economy will continue to grow slightly above 2% for the year and into 2014 and that some of the risks coming from Europe and the "fiscal cliff" have "abated a bit."

"I don't think the risks around the outlook are nearly what they were a year or more ago, and that gives me more confidence in the sustainability going forward," Lockhart said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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