ATLANTA - Atlanta Federal Reserve Bank President Dennis Lockhart Tuesday took a very cautious approach to consideration of additional monetary stimulus, neither ruling it in or out.
But Lockhart sounded a bit less inclined to support additional Fed easing than he did in mid-July in wake of economic and financial developments that he said he found encouraging.
Lockhart, a voting member of the Fed's policymaking Federal Open Market Committee this year, said that if the FOMC does decide that more accommodation is needed he would favor using the tool that has the most "discernible effect." But he didn't identify what that would be.
Speaking with reporters following a breakfast address to the Latin American Chamber of Commerce and the World Affairs Council, Lockhart was asked whether he thinks the economy needs more Fed stimulus. His response was noncommittal.
"I'm in the process of weighing all the considerations that go into any change in policy or any additional policy, and I'm not finished with my process," he said. "I think it's a cost-benefit calculation to consider more monetary stimulus."
He said he is trying to think ahead up to three years in considering what more, if anything, the economy needs from the Fed.
In prepared remarks, Lockhart had said "there is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms," and said "monetary policy is not a panacea."
Lockhart sounded distinctly more ambivalent about additional stimulus than he did at a July 13 appearance in Jackson, Miss.
While saying then that more quantitative easing would not be "a miracle cure," he warned, "If the economy continues on the track indicated by the most recent incoming data and information," his forecast of stronger growth and employment "will become untenable, as will the policy premises underlying it."
He told reporters on July 13 that he had been "watching the economic data and listening to what people tell us about what's going on in the economy with increasing concern, and in that sense ... my receptivity (to QE3) has increased a bit."
"If I felt the economy required it -- speaking for myself -- I'd have no reticence in taking action," Lockhart added.
Referencing those comments, MNI asked Lockhart whether recent more positive economic data had caused him to take a step back from QE3.
"The data just recently have been a little firmer," he replied, "and I think that certainly can influence how ready a policymaker might be to make a move at a particular point of time."
Lockhart added that he is "increasingly framing the question as more of a three-year plus outlook kind of question ... . What's the outlook from here? ... . That's the way to frame the question whether more policy is needed or not."
Lockhart also said the recent stock market rally has been "encouraging" in that it shows "more appetite for risk." The rally shows that markets are "discounting" the economic outlook "more favorably."
He said the rally suggests there is "more confidence that Europe will work through its problems without major incident of some kind ... . It adds to a more confident atmosphere ... . It's part of the cause and effect of getting the economy moving."
On another upbeat note, Lockhart said he "see(s) far less risk in the housing sector ... . It certainly appears to be stabilizing, improving."
"That's an important sector of the economy," he said. "The level of activity in housing is quite a bit lower, but the direction is encouraging."
As for the dreaded "fiscal cliff," Lockhart said it is having some adverse effect on the economy, but he suggested that the Fed should not necessarily base monetary policy on those near-term effects.
"My own expectation is that Congress will find a way to handle that so that the most severe calculations of the effect on GDP don't come about," he said.
Responding to an MNI question about how the Fed should figure fiscal drags into monetary policy, Lockhart said he believes "you have to premise policy on an outlook that takes into consideration some contingencies related to fiscal matters that could produce more downside."
"In my own base case, I'm not assuming the worst case scenario," he continued. "At the same time recognize that there's already some discounting of that possibility affecting the economy right now ... But in general you have to look past that event and think in terms of the more medium-term outlook."
"My assumption is that (the fiscal cliff) will be dealt with by the Congress," he reiterated.
Lockhart expressed dissatisfaction with the pace of job growth, but stressed that the July rise in the unemployment rate from 8.2 to 8.3% was due to "rounding" and should not be overemphasized.
He said deflation is "on my radar screen," with inflation running slightly below the Fed's 2% target, but said, "I don't think at the moment that it's something I need to factor into my own thinking as a real risk." He said higher oil and food prices are likely to raise the inflation rate back above 2%.
Asked by MNI what his preferred tool would be if the FOMC does decide on Sept. 12 or beyond that more easing is needed, Lockhart initially said he didn't want to talk about his preferred tool "because it's not yet decided that's the course of action."
But, he added, "if the conclusion is that the economy needs more support clearly we ought to use a tool that has the potential to provide support."
Most officials and Fed watchers think that asset purchases would be the most potent tool. Asked by MNI if that's what he had in mind, he said the FOMC would "have to make an evaluation of that tool that is likely to have a discernible effect."
Earlier, in response to a question from the audience about when the Fed will begin raising interest rates, Lockhart said he "stands by" the FOMC's Aug. 1 statement, which reiterated that it expects the federal funds rate to stay near zero "at least through late 2014."
That is "another way of saying I expect interest rates will remain stable or low for close to another two years," he said.
Lockhart said the FOMC's conditional commitment to delay rate hikes until at least late 2014 is "appropriate policy given the state of the economy."
But he emphasized, "We review that policy at each meeting, so you should not take that as a cast-in-stone commitment ... . It is conditioned on the state of the economy and the outlook at any given time when we're reviewing policy."
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