KANSAS CITY — Atlanta Federal Reserve Bank President Dennis Lockhart Thursday underlined his support for the aggressive stimulus announced by the Federal Reserve last week, arguing that the purchase of mortgage securities in particular should support a housing market that appears to be on the up.
Speaking to reporters following a speech at the Kansas City Fed's conference on workforce development, Lockhart also said he would need to see job growth at or above 150,000 a month as a sign of improving labor market conditions.
He also made clear, when asked by MNI what will succeed the Fed's Operation Twist program, that economic conditions and the outlook when the program expires at the end of the year will determine the Fed's next step.
For now, "I think it's conceivable we can actually see some results coming out of the early stages of the mortgage-backed security purchase program," he said.
"I actually think it's well-timed because of some of the improvement we are picking up in the housing market," Lockhart added. "So I think a bit more support for the housing sector actually could produce some pretty measurable results over the next months."
Recent housing data has indicated that the housing market is starting to improve. Tuesday, the National Association of Home Builders September sentiment index rose to a five-year high, and on Wednesday housing starts and existing-home sales were both reported to have been stronger in August.
Lockhart described it as "a nice coincidence of timing" that the housing market was "spontaneously" starting to pick up in terms of sales activity, upward price pressure in a number of markets, and even some construction activity.
"I hope that the mortgage-backed security program will continue to support that improvement," he said.
Lockhart did add, however, that the program will be reviewed from time-to-time based on both its efficacy and the progress, particularly, of the labor markets.
In its statement announcing additional quantitative easing measures, the Fed's policymaking Federal Open Market Committee did not set an end-date, indicating that it would continue so long as the outlook for the labor market does not improve substantially.
Asked what would constitute a meaningful improvement in his eyes, Lockhart noted that earlier in the year the U.S. economy was adding an average of 150,000 jobs a month. That has since fallen to below 100,000/month in the last four months.
"A resumption of net job creation at 150,000 or higher would be one indication of the employment markets improving," he said.
Broadly speaking, assuming participation rates are stable, "it takes 150,000 or more to achieve this gradual reduction in unemployment that I've forecast," Lockhart added.
He said other indications of a healthier job market would be initial jobless claims coming down, continuing claims "falling off over time," and improvement in other measures that are outside the realm of the unemployment rate.
The FOMC announced last week Thursday that in addition to its maturity extension program, it will buy $40 billion in mortgage-backed securities a month until it sees a significant improvement in the labor market. It also pushed out its forward guidance -- how long it expects interest rates to remain close to zero -- to mid-2015 from late-2014.
Leading up to the announcement, Lockhart had maintained that it was "a close call" whether or not the Fed needed to do more.
In voting for the decision, "I simply came to the conclusion, on a net basis, that [QE3] would help the economy, and that the costs associated with that -- or the potential risks associated with that -- were not severe, were and will be in the future manageable," he said.
The Fed also decided to continue its maturity extension program, commonly referred to as 'Operation Twist,' which means that combined with its MBS buys, the Fed will be making asset purchases of $85 billion a month until the end of the year.
Operation Twist is set to end in December, and MNI asked Lockhart what factors would influence his thinking on what should replace it.
"I would very much prefer that we review the state of the outlook for the economy early in the new year and make that decision at that time," he said.
On the question of if there will be an incremental program to substitute for the expiration of Operation Twist, Lockhart reiterated that he would like to face that issue down the road "based on what the outlook looks like at that time."
Asked by MNI if the Fed's aggressive measures have influenced his outlook for the economy this year and into 2013, Lockhart said the Atlanta Fed expects a continuation of modest/moderate growth with gradual improvement in employment.
"I do expect 2013 will look better than the experience we've had through 2012," he said.
At the same time, however, Lockhart stressed the need to be mindful of certain risks to the outlook that are "pretty serious." The "most prominent one," he said, is the looming fiscal cliff of tax hikes and spending cuts in the United States.
A failure to address the fiscal cliff, he warned, is a development "that we need to avoid."
The spillover from the European crisis continues, he added, although it has abated somewhat in recent weeks. There are also geopolitical events that could have some "shock effect" where matters to escalate, Lockhart warned.
"So there are a number of risks out there that could undermine the basic idea or the basic thought of a better 2013," he said. Assuming the economic can get past these risk elements, Lockhart predicted that the combined effect of monetary policy and the lifting of some uncertainty will underpin better economic activity next year.
Commenting on worries that the Fed's measures will stoke the fires of inflation, Lockhart declared that the risk of a serious uptick in inflation is "pretty remote."
He noted a very recent rise in the break even numbers of Treasury Inflation-Protected Securities, but said he is not yet ready to conclude that it is permanent and therefore signifies an "ominous" move in inflation expectations.
Still, "I'm taking note of that," he said.
Inflation numbers continue to be broadly centered around the FOMC's 2% target, Lockhart said, "so at the moment I'm comfortable that inflation is not getting out of hand."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.