NEW YORK - Although he’s “cautious” about the need for more monetary action since “we do not yet have enough information to conclude the economy won't resume a healthier pace of growth,” but the Fed has the tools, if needed, to ease policy, Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday.
He added that he believes “a resumption of growth is the most likely case.”
“Not every economic problem we face has a monetary policy fix,” Lockhart told the Rotary Club of Florence, Ala. “That is the reason I have said repeatedly that the hurdle to justify additional monetary policy stimulus should be high. But the events of the last several weeks are a reminder that circumstances can quickly arise that may call for additional monetary actions.”
But, he warned against jumping to conclusions. The current economy is clouded by “immediate uncertainties,” which need to dissipate before policymakers are certain where the economy is.”
“As recently as two weeks ago, there was a widely held view that the U.S. economy was in a soft patch with a good chance of turning up in the second half of 2011. The rapid-fire developments of the last several days, along with some troubling data releases, have shaken confidence,” he said. “People are worried. Investors, Main Street businessmen and women, and consumers are wondering which way things will tip. The public—and for that matter, policymakers—are operating in a fog of uncertainty that is thicker than normal.”
If the Fed needs to take further action to right the economy, it will. “If the anemic growth in the first half of this year is a soft patch in an ongoing, moderately paced recovery, additional monetary stimulus is probably of limited marginal value. But saying this is not the same thing as saying that monetary policy would be ineffective if conditions deteriorate. Expansion of the balance sheet or changes in the composition of the Fed's asset portfolio are available, in my view. These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory,” he said.
“It should also be emphasized that the Federal Reserve, as the central bank, has ample tools to deal with any reemergence of acute financial or liquidity strains in dollar funding markets here and abroad. Given the interconnectedness of global markets, it is in the best interest of the U.S. economy to quell liquidity strains in dollar markets when they arise.”
