WASHINGTON — The Federal Open Market Committee was correct to delay the beginning of tapering considering the risks posed by the government shutdown and the default threat, and the question of when to begin to pare back purchases may be a top topic at the Fed into the spring, Atlanta Federal Reserve Bank President Dennis Lockhart told CNBC Friday morning.
The Capitol Hill paralysis while government shut as the debt limit impasse grew more serious was "event risk" that "may be with us again in January," Lockhart said. The gathering crisis was a factor, he said, in the decision in the September FOMC meeting to put off tapering. Current government funding runs out Jan. 15.
In retrospect, "I think the decision to hold off has been vindicated, really, by what has developed," he said.
While tapering should be "on the table in the coming meetings," Lockhart said he is not saying it should necessarily begin in December. "I fully expect that we'll be talking about it in December, January and March."
"The tapering decision should happen, if it is going to happen, when the economy is ready and when the market is prepared," he added.
He acknowledged preparing the market has turned out to be harder than expected. "There's a distinction between the rate policy, the targeting of the federal funds rate and the asset purchases," he said, but that distinction "has not been broadly accepted in the market."
Lockhart generally dismissed current concerns with the inflated size of the Fed's balance sheet. "At the moment I don't think we're in the danger zone. I think it's manageable; the exit will be manageable when the time comes."
Nevertheless, Lockhart said it is likely shrinking the balance sheet will take years, meaning there is "plenty of time" to prepare for that. The Fed is sensitive to the fact that "the reality is we've never been in this place before." Yet, "I'm not overly worked up over this."
Over the long timeline for exiting, "some unanticipated things could happen," but it's difficult to plan for the unexpected, he said. "Some things aren't knowable," he said.
Lockhart said he continues to favor "beginning to phase out" asset purchases and to "change the mix of policy tools."
"We're going to remain very accommodative for quite some time, in all likelihood, a number of years," he said, "but the mix of tools that we use can change and that's where the tapering decision comes in."
On the economy, it's "certainly growing but growing at a slow pace," but the second-half acceleration the Fed anticipated "really hasn't materialized yet." Lockhart said he is forecasting "that we will see a pickup in 2014."
Up to now the net impact of quantitative easing "has been positive," he said, and has "supported the recovery. Whether the policy has, at any given time, been decisive, I think is another question."
Worth noting, he continued, is that, "Since the initiation of the most recent round of asset purchases in September 2012, we've have in fact made quite a bit of progress on the employment front." In the last three months, the addition of 200,000 jobs per month on average suggests QE's "benefits have outweighed the costs."
Lockhart is not an FOMC voter this year or next but said the discussion among both voters and non-voters builds toward the eventual vote that locks in policy.
Fed governors and presidents before FOMC meetings are not comparing notes behind the scenes on what to say in their speeches and are truly "independent agents," he said. Listeners, he went on, probably understand they are hearing "individual opinions that are taken to the table for what turns out to be a consensus decision at the end of the day on policy." The broad consensus eventually becomes a vote among the 12 current FOMC voters.
Generally speaking, he said, the Fed's top officials make broad assessments of the economy and aren't influenced only by larges moves in stocks or bonds. They pay attention to interest-sensitive sectors like housing and "broad financial markets" and factors that influence "the real economy."
On Janet Yellen, who Thursday was recommended by the Senate Banking Committee for full-Senate confirmation to succeed Ben Bernanke, Lockhart repeated she is a "fine economist" and as a former president of the San Francisco regional bank, "is extraordinarily well rounded for this position and I hope she's confirmed."
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