MARIETTA, Ga. — Atlanta Federal Reserve Bank President Dennis Lockhart joined fellow Fed policymakers Thursday in suggesting that financial markets have overreacted to Fed Chair Ben Bernanke's statement last week that the Fed could start scaling back its bond buying "later this year" and perhaps end it by the middle of next year.
Lockhart said Bernanke was not saying the Fed will go "cold turkey" in terms of phasing out its quantitative easing, but will move flexibly in response to evolving economic conditions.
There "no predetermined pace" of reductions in asset purchases from the current $85 billion a month, and changes in the size and composition of bond buying will be done "meeting by meeting" in response to changes in the economic data and outlook, he said in remarks prepared for delivery to the Kiwanis Club of Marietta.
Monetary policy will need to stay "highly accommodative ... for quite some time," said Lockhart, speaking just over a week after the Fed's policymaking Federal Open Market Committee kept the amount of Treasury and mortgage-backed securities purchases the same but "deputized" Bernanke to signal the potential beginning of tapering "later this year."
Stocks plunged and bond yields soared after Bernanke made his comments in a post-FOMC press conference.
Lockhart, who is not a voting member of the FOMC this year, took light-hearted umbrage at the negative market reaction.
"Financial markets have been volatile recently," he observed. "They may be reacting to a number of things. Certainly among these is Fed communication."
"It could be argued that financial markets are reflecting a different interpretation of Chairman Bernanke's commentary," Lockhart continued. "I don't want to be too cute about a serious matter, but to make an analogy, it seems to me the Chairman said we'll use the patch (and use it flexibly), and some in the markets reacted as if he said 'cold turkey.'"
Earlier Thursday, New York Federal Reserve Bank President William Dudley also took issue with the market reaction to the FOMC announcement, saying that expectations of hikes in the federal funds rate earlier than previously thought are "quite out of sync with both FOMC statements and the expectations of most FOMC participants."
Lockhart did not dispute the likelihood of some reduction in the pace of bond buying. After projecting a pick-up in the GDP growth rate and a reduction in the unemployment rate to 7% by mid-2014, he said, "If the broad economy evolves close to the outlook I laid out - which itself is close to the composite forecast of the 19 FOMC participants - then the economy will be on track to a better place."
"In that circumstance, I think the position that the economy does not need quite as much stimulus is fully supportable," he added.
But Lockhart sought to soften market expectations of monetary tightening.
"As the Chairman made clear, there is no 'predetermined' pace of reductions in the asset purchases, nor is the stopping point fixed," he said.
"The pace of purchases, the composition of purchases, and the ultimate size of the Fed's balance sheet still depend on how economic conditions evolve," Lockhart said. "All elements of the asset purchase program will be considered on a meeting-by-meeting basis in light of the incoming data and economic outlook."
Bernanke's comments "do not constitute an enormous shift in policy," he said.
Even if the asset purchase program is reduced in scale, "I still anticipate that the very low interest rate policy will remain in place for a considerable time after the end of asset purchases, and thus policy will remain highly accommodative," he said.
Lockhart suggested Q.E. tapering may not proceed as fast as Bernanke seemed to suggest.
"This policy course will not be particularly difficult if the signals are clear that the economy is evolving as envisioned," he said. "But the world is rarely so cooperative ... I don't think we can completely rule out greater fiscal drag than anticipated, or intensified effects of global economic weakness, or structural challenges becoming more apparent, or shocks that move the economy off course."
Lockhart also called attention to low rates of inflation and said "the inflation situation calls for close monitoring."
His comments were generally consistent with those made by two FOMC voters earlier Thursday.
Dudley said "the FOMC's policy depends on the progress we make towards our objectives. This means that the policy - including the pace of asset purchases - depends on the outlook rather than the calendar.
"Economic circumstances could diverge significantly from the FOMC's expectations," Dudley said. "If labor market conditions and the economy's growth momentum were to be less favorable than in the FOMC's outlook - and this is what has happened in recent years - I would expect that the asset purchases would continue at a higher pace for longer."
Fed Gov. Jerome Powell echoed Bernanke when he said that "if the Committee's economic outlook is broadly realized, there will likely be a moderation in the pace of purchases later this year."
"If the performance of the economy is weaker, the Committee may delay before moderating purchases or even increase them," Powell said. "If the economy strengthens faster than the Committee anticipates, the pace of purchases may be moderated somewhat more quickly. The path of purchases is in no way predetermined; we will monitor economic data and adjust our purchases as appropriate."
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