Given the “slow recovery” in the economy, the Federal Reserve should make “continued measured efforts” to spur gross domestic and employment growth, but for now these should be confined to using Fed “communication” tools to reassure markets that interest rates will stay low, Federal Reserve Bank of Atlanta president Dennis Lockhart said Monday.

A third round of large-scale asset purchases or “quantitative easing” cannot be ruled out, given the “larger-than-normal risks” posed by the European debt crisis, but QE3 is not appropriate in current circumstances, Lockhart said in Tokyo.

But Lockhart left no doubt he would support QE3 if already unsatisfactory economic activity is further depressed by a shock, especially if inflation falls below the Fed’s 2% target.

When the Federal Open Market Committee launched the $600 billion QE2 program, “circumstances … were dominated by a falling trend in measured inflation, weakening inflation expectations and rising probabilities of outright deflation.”

That is not the situation now. Lockhart expected “modest growth” in the next few years, with inflation “steady” near 2%.

However, “there are larger-than-normal risks to my outlook,” he said. “Chief among them is the potential for broad spillover from Europe to the U.S. and global economy resulting from financial system disruption as well as further economic slowdown.”

While noting that the Fed’s $400 billion “Operation Twist” is scheduled to end on June 30, he did not hint that the program needs to be prolonged, though he did not rule that option out.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.