OXFORD, Miss. — Atlanta Federal Reserve Bank President Dennis Lockhart Friday offered up a cautiously positive outlook for 2014, with concern about the fiscal drag and how that will impact consumer spending, and he called for monetary policy to remain very accommodative "for quite some time."
In remarks prepared for a banking symposium, Lockhart lauded the Fed's current policy combination of forward guidance on interest rates and its $85 billion a month in asset purchases, but said it might be "appropriate" to adjust that mix going forward.
Lockhart is not a voter on the Federal Open Market Committee this year but he opined nevertheless that, "I think of asset purchases as supplemental stimulus on top of low short-term interest rates - current and prospective."
"Going forward, it may be appropriate to adjust the policy tool mix. That will depend on circumstances and the economic diagnosis of the moment," he added.
"I expect things to pick up in 2014, but it's possible the economy will stay on its current track and we'll see no acceleration. The right monetary policy for these circumstances is continued strong stimulus," he said.
The FOMC began its third round of bond buying in September 2012 to spur faster jobs growth. The U.S. Bureau of Labor Statistics Friday reported a surge of 204,000 in October payrolls, much higher than the 120,000 expected. September and August's combined upward revisions added 60,000 to the year's level of payrolls.
Lockhart acknowledged that "substantial progress has been made on the employment front" despite slow growth, but cautioned that there is more to be done. He pointed to an inflation rate that remains too low, which "carries some risk of a weakening economy."
He forecast a 2014 growth rate in the range of 2.5% to 3%, but stressed that "next year's economic outcomes will swing importantly on fiscal drag and consumer spending."
"Even with better growth, in all likelihood, at year-end 2014, inflation will still be too low and employment levels will be well short of the goal," Lockhart predicted, "therefore, monetary policy overall should remain very accommodative for quite some time."
"The mix of tools we use to provide ongoing monetary stimulus may change, but any changes will not represent a fundamental shift of policy," he added.
Despite what has been a good jobs story since September last year, Lockhart said several measures of labor market health are "less than satisfactory," and in addition "there are real concerns about whether the recent modest pace of GDP growth is enough to maintain employment momentum."
On the inflation front, Lockhart said a persistent low rate of inflation raises concerns about a stalling out of economic expansion.
For now, Lockhart does not see any reason to be alarmed about inflation, noting that it has been "reasonably stable," albeit at a low level that is "well below" the FOMC's 2% target. "It's not falling, but it's also not showing much tendency to move toward our targeted goal," he said.
Lockhart said he and his staff at the Atlanta Fed expect the direct impact from the October federal government shutdown to be "relatively small and temporary," and so remains "cautiously optimistic" that growth will pick up in 2014.
"But, at this juncture, I can't fully discount the possibility that the expected economic improvement won't materialize and that we'll see a replay of the weak growth of the past three years. This possibility is an influence on my thinking about the appropriate direction of monetary policy," he said.
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