Fed's Lockhart: Premature to Think QE3 Taper Imminent

STONE MOUNTAIN, Ga. — It is too soon for the American public to anticipate that the end to the Federal Reserve's aggressive bond buying to support the recovery is imminent, Atlanta Federal Reserve Bank President Dennis Lockhart said Wednesday.

Speaking to reporters on the sidelines of the Atlanta Fed's Financial Markets Conference in Stone Mountain, Georgia, Lockhart said there are a number of options on the table related to how the Fed's large scale asset purchases could be wound down.

However, "I do think ... a lot of focus on that at the moment is maybe a bit premature," he said.

"I do want to emphasize that I think here, even in early April, it's a little early for the public to be getting high anticipation that this is going to happen imminently," Lockhart added.

Lockhart is not a voter on the policy-setting Federal Open Market Committee this year.

Lockhart said he believes Fed officials still have to wait and observe the economic data that comes in and see how the economy evolves. "So in some respects I don't want to feed too much of this fixation on what's going to happen with the LSAP program."

Lockhart reiterated his belief that it is possible conditions develop in the second half of the year or in early 2014 that will allow "some measure" of winding down the Fed's buying of $85 billion a month in U.S. Treasury securities and mortgage bonds.

That could come in the form of tapering the asset purchases, or an announcement, or more of a "month-to-month calibration of what we want to be doing, all those options remain on the table," he said.

Focusing on the Fed's purchases of mortgage-backed securities — currently at a pace of $40 billion a month — Lockhart said it is conceivable the central bank could hold those securities.

"That would suggest that in the event there is a winding down, it would not be done proportionally with mortgage-backed (securities) and Treasuries," he said.

Lockhart stressed that at this stage all of this is speculation, as he does not know what the FOMC will decide.

Asked under what circumstances the Fed could up its asset purchases, Lockhart said if the U.S. was hit with a "significant economic shock," with the possibility of a recession or worse, then the central bank would have to consider additional action.

"I don't believe that the winding down of what I would consider a temporary boost to the recovery to basically bolster momentum requires that you arrive at your end game," he said. "I think it's more a question of being able to foresee that that end game will be accomplished at some stage in the not-too-distant future, and that — very importantly — the momentum appears to be self-sustaining."

Regarding the broader economy, Lockhart said he is getting the sense that U.S. consumers are feeling "a little bit more optimistic," and believe the economy is picking up.

"Confidence levels are holding up and, in some cases, improving," he said.

The U.S. economy added just 88,000 jobs in last month, a figure that Lockhart said was "disappointing" but hasn't revised his thinking.

At the same time, "I don't think we should overreact to one month," he added. "You overreact to two or three months' (jobs) data as really indicative of the economy being on a different track than we thought."

"I would counsel patience to see what develops in the next few months in terms of the jobs report," Lockhart continued, saying the jobs numbers still reflect a "gradual improvement" in the labor markets consistent with economic growth in the 2% to 2.5% range.

Lockhart did say he remains concerned about the labor participation rate dropping.

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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