NEW YORK – Exit strategy was the hot topic last year, and while pushed off by a “soft patch” mid-year and even though he’s not expecting an immediate need for an exit strategy, Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart said Monday, “we will have to decide when to actively implement an exit strategy. And though the answer to when to do this is clear in concept, it is not straightforward in practice.”
As for asset purchases, Lockhart said he’d be “very cautious about extending asset purchases after June. Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options.” He praised the second round of asset purchases, and said he supported the decision to make those purchases.
Calling his economic views “pretty mainstream,” Lockhart told a NABE conference in Arlington, Va., the economy is showing “moderate strength,” while growth continues to accelerate. There are positive trends in GDP private spending components, personal consumption is showing brisk growth, but the “housing sector remains a soft part of an otherwise encouraging picture.”
In terms of sustained growth, we can compare early 2011 to early 2010, “It is true that GDP growth was slower at the end of 2010 than at the end of 2009 and will likely be somewhat slower in the first quarter of this year than it was at the beginning of last year. Despite that, I have more confidence in the fundamental strength of the economy than I did a year ago,” Lockhart said, according to prepared text of his speech, which was released by the Fed. The added confidence comes from stringer growth in consumption and investment and stronger demand for exports.
Turning to inflation, Lockhart said, food and energy prices have pushed up headline consumer inflation numbers, while core has also firmed, putting inflation near the 2% level policymakers are comfortable with. Also, Lockhart dismissed “considerable public concern” that the recent uptick in inflation will be followed by further increases. “I don’t expect this to happen.”
While there is talk that businesses are ready to push through price increases to make up for their added cost, Lockhart said, “My sense is there is still concern that demand is fragile and pricing power too limited for most markets to take extensive price increases.”
Employment received a boost from Friday’s employment report, but, Lockhart warned, “it is premature to declare a jobs recovery firmly established. I continue to hold to the view that achieving something close to full employment will take some time.”
Overall, Lockhart sees growth 3% to 4%, inflation near 2%, and gradual employment growth. “Where my views might depart from the mainstream to some extent is on the question of the range of plausible economic scenarios from this juncture. In thinking about an appropriate and balanced policy for at least the near term, it seems to me a critical question is whether the range of plausible scenarios is narrowing (that is, is certainty growing) or widening (that is, is uncertainty growing). My view is the range has widened—not dramatically, but somewhat. For some time, my list of headwinds and risks has encompassed European sovereign debt, our own federal, state and municipal fiscal challenges, house prices, and commercial real estate. My sense of the balance of risks has shifted with the addition of unrest in the Middle East and North Africa. … Nonetheless, my base case forecast sees continuing improvement but with concern about growth downsides and price upsides.”
Lockhart said the Atlanta Fed has started “monitoring a so-called “sticky-price” index, derived from subsets of consumer prices that change relatively infrequently. The idea is businesses that only periodically change prices have a big incentive to make pricing decisions that incorporate their best guesses of how prices will move until their next opportunity to adjust prices again. Like TIPS-based measures, the sticky-price index gives us a measure of inflation expectations derived from people making real decisions in markets. Unlike TIPS-based measures, the sticky-price index focuses on signals from the product markets that we ultimately care about.”
