Atlanta Federal Reserve Bank president Dennis Lockhart said Thursday that increasing purchases of longer term Treasury securities is “certainly an option” for the Federal Reserve in response to rising bond yields, and said the Fed needs to “maintain” the size of its balance sheet as shorter-term assets diminish.
But Lockhart, a voting member of the Fed’s policymaking Federal Open Market Committee, said in a telephone interview with Market News International that there could also be drawbacks to increasing longer-term Treasury purchases. So he said he has not made up his mind yet.
Lockhart said the Fed needs to be “anticipatory” and not wait too long to tighten monetary policy, but added: “We’re not there yet.” He said he would like to see more evidence that recovery is at hand, if not absolutely certain.
As things now stand, Lockhart sees only a “sluggish” recovery, with the economy not returning to its potential until perhaps 2010. Given that forecast, he downplayed the threat of inflation.
Nevertheless, given mounting talk of inflation in the market, Lockhart said he can envision circumstances in which the Fed might, at some point, want to raise the federal funds rate from near zero, while continuing to run an expansionary quantitative policy — something he said the Fed can do now that it pays interest on reserves.
For the time being, Lockhart said monetary policy needs to be “supportive of recovery.”
— Market News International
