FORT LAUDERDALE, Fla. - Atlanta Federal Reserve Bank President Dennis Lockhart Thursday said he believes it is now appropriate for monetary policymakers to begin considering dialing back the Fed's large scale asset purchases in coming meetings, but stressed that his support for tapering is contingent on continued "positive" evidence of progress and an absence of threats to the recovery on the horizon.
In remarks prepared for the Broward Workshop in Ft. Lauderdale, Fla., Lockhart also identified himself as one of those at the October meeting of the Federal Open Market Committee who supported unveiling a timetable for winding down the $85 billion a month in bond purchases - once the decision to begin tapering has been made.
Lockhart does not rotate into a voting position on the FOMC until 2015.
"I expect that a decision to begin tapering asset purchases will be considered in the coming meetings of the FOMC," Lockhart declared, "in my assessment, the trajectory of recovery - the outlook for the economy - justifies consideration of such a move."
He said his outlook for 2014 calls for "some firming in economic activity," adding that "along with that expectation for stronger output growth, I am expecting labor markets to continue their gradual improvement and inflation to move in the direction of the FOMC's 2% target."
On the threat assessment side, "There are always risks, but over the past year, I believe many of the most worrisome sources of risk have retreated," Lockhart said.
"As I think through the various factors to take into account - the data evidence, the outlook, the balance of risks - I am pretty confident in the sustainability of the economy's progress," he said.
As a result, "I now think it is appropriate in coming meetings to put a tapering decision on the table as long as the resulting overall posture of policy preserves a high degree of accommodation," Lockhart added.
He emphasized that in deciding whether or not to support a start to tapering, "I'll be looking for positive evidence of momentum as well as the absence or retreat of factors that could restrain or even torpedo progress."
The Atlanta Fed chief said he will want to see "continuing positive evidence that employment is growing at a sufficient pace to sustain a steady, if gradual, march toward the Fed's objective of full employment."
In addition, Lockhart said he will be on the lookout for "evidence of important elements of growth - important components of GDP - acting as drivers." An example would be the growth of consumer spending, and Lockhart argued that "I think there are reasons to be optimistic that consumer spending will strengthen."
On the risks that he would hope to see dissipate in order to support slowing the pace of asset purchases, Lockhart said he is expecting a fall-off of fiscal drag in the coming year, although the net drag of reduced government spending is projected to lessen, but not entirely dissipate, in 2014.
He will also be on the lookout for any signs of disinflation, noting that "while I don't yet see convincing evidence that a disinflationary trend is under way, inflation trends bear careful watching."
As for potential threats outside the Fed's control, he noted that the risk of severe financial instability from Europe has been "managed down," while the risk of an oil or energy price shock that would harm the U.S. is relatively low.
But with the October budget battle in Washington D.C., Lockhart remains cautious, noting that "the same fiscal matters come to a head again in January, of course, so we can't yet breathe easy. There is still significant risk - that has to be acknowledged."
When the FOMC does decide to begin winding down its asset purchases, Lockhart argued that "it will be helpful to the transition process to provide as much certainty as possible about how this will be done."
He referred to a passage from the minutes of the October 29-30 FOMC meeting, which showed that some participants indicated it might be preferable to announce a total size of remaining purchases or a timetable for winding down the program.
They argued that, "A calendar-based step-down ... would be easier to communicate and might help the public separate the Committee's purchase program from its policy for the federal funds rate and the overall stance of policy."
Lockhart said he is among those who see merit in this approach "as long as the economy follows roughly the path we expect."
"Once the decision is made, I favor providing the public as much clarity and certainty as possible about how the change will be executed," he said.
Overall, Lockhart said U.S. economic conditions have improved a lot, but remain "short of what you'd call victory."
He noted that "positive developments that suggest the glass is half full are offset by areas of persistent weakness that bias some observers to the view that the economic glass is half empty."
For instance, he said changes in inventory investment that fueled the growth seen in Q3 are often followed by the working off of inventories. "As a consequence, growth this quarter is very likely to be only half that seen in the third quarter as those inventories are drawn down," he said.
"In an economy as large, complex, and diversified as ours, the data are almost always going to be somewhat noisy," Lockhart concluded. "That said, it's my judgment that the recent incoming data are, on net, positive."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See
