NEW YORK – Despite “leaning” toward further monetary stimulus, “the decision is not clear cut,” and the costs and benefits will have to be debated, Federal Reserve Bank of Atlanta President Dennis Lockhart told the Savannah Rotary Club Monday.
“In my view, the decision is not clear cut,” Lockhart said of further quantitative easing, according to a prepared copy of his remarks, which was released by the Fed. “We policymakers have to weigh these arguments pro and con, potential costs versus benefits, and competing risks. As I said earlier, I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present. At this juncture, and given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation leading to deflation. In my mind, QE2 is a form of risk management-an insurance policy that is prudent to put in place at this time.”
Lockhart said he would also like the Fed to adopt a more explicit inflation objective, which would strengthen further stimulus and “compensate for potential risks of the policy action.”
Noting that inflation is near 1% and unemployment is 9.6%, Lockhart said, “it's clear that the economy is not where we want it to be. In my mind, the question is whether this situation is a call to immediate action.”
At the moment, the risks to the economy “are more to the downside.” While growth is sluggish and inflation near zero, deflation is a concern. “This possibility is by no means my base case expectation, but I don't think it can be blithely dismissed. For now it is a risk, not an actual developing feature of the economy,” Lockhart said.
There is no conclusive answer as to whether the problems with the economy are structural or cyclical, Lockhart said. He noted that uncertainty is often cited as a factor constraining job growth, which “cannot be dispelled by monetary policy.”
“I do believe there is scope, at the margin, for further monetary stimulus to induce households and businesses to overcome their current spending caution, even while deleveraging,” he said. “A quantitative easing program of scale should have the effect of making credit cheaper and, if successful in upgrading the outlook, more available as loan demand rises.”
