BERLIN — The U.S. municipal bond market has been fairly stable, despite recent dire predictions that municipalities could default in droves, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said Tuesday.

In a Q&A session following prepared remarks at a conference in the German capital, Lockhart said, "It is my impression that the municipal bond market has been relatively stable. It's had a few defaults but not an extraordinary number, not much outside the normal course of business in the municipal arena."

"In that respect, I am less nervous," he continued. However, he cautioned, "as the discount rate on future benefits becomes more realistic, whether imposed by municipal fund accounting or by trustees ... then the true picture is going to become more evident."

"So I don't think this is one you should sleep easy over, it's just that the situation hasn't evolved as badly" as some expected, he added.

Should there be a problem on these markets, the Fed might not be able to do much, he implied, noting that the law prohibits Fed purchases of municipal assets.

Regarding Fed policy, Lockhart observed that "the effect of quantitative easing if it works is to suppress interest rates and therefore yields on bonds and yields on interest- bearing investments."

"Our effort ... to stimulate the economy to greater levels of growth is having the effect of lowering the investment returns of pension funds," he said. "So call that a sort of collateral effect, if you will, of a policy that's meant to stimulate the economy to greater growth."

Asked about the Dodd-Frank Act and the Fed's power in a crisis, Lockhart noted that "any decision on the part of the Federal Reserve to create credit facilities, a credit easing mechanism to support individual markets, the repo market ... has to be approved by the Secretary of the Treasury."

He continued: "My own judgment is that this is sufficient - a satisfactory framework for responding to most situations that could arise. ... It's clear that the ... Dodd Frank Act changed things but did not really seriously constrain in a dangerous way what we could do in a crisis."

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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