NEW YORK – Reducing the Fed’s balance sheet needs to be done neither too fast nor too slowly, Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart said today, adding that he backs interest rates remaining low for an "extended period."
“A bit like Goldilocks' porridge, the exit or unwinding process needs to be—in my view—not too fast, not too slow, but just right,” Lockhart told the Rotary Club of Atlanta, according to prepared text of the speech, which was released by the Fed. “I continue to support an interest rate policy described in recent FOMC statements as low for an `extended period.’ What does `extended period’ mean? I don't want to put a date on it. To me, it means the policy rate will be kept low until recovery has shown momentum that is based on private business and consumer demand, job growth is established or at least imminent, and the downside risks appear to be safely navigable. This unwinding is in the context of well-behaved inflation, of course.”
Recovery is under way, likely having begun in the third quarter of 2009, he said, and with it is the changeover from “government-provided life support to private sector–propelled consumer and investment activity.”
While the GDP growth of 3% to 3.5% in the second half of 2009, was not as strong as many had hoped for, Lockhart called it “a welcome relief after the severe drop-off in consumer spending, business investment, and exports that occurred early in 2009.”
However, consumer spending is expanding but remains constrained by the poor jobs market, “modest income growth, lower housing wealth, and tight credit.”
Business spending is also subdued as the federal government debates health care, taxes, and climate change.
The housing sector remains mixed, with seem stabilizing and sales inching up, the pending sales index slumped in November, suggesting weaker months ahead.
“Financial markets, including credit capital markets, are performing better, and this improvement has supported the economic growth we're seeing,” he said. “But the banking system, although certainly in better shape than a year or more ago, is still in a weakened state and still needs a lot of repair.”
Lockhart summarized: “the current situation, the economy is on the mend, but it's not free of drags or risk.”
Further, Lockhart expects continued slow economic growth “over the foreseeable horizon,” with short-term growth “probably not … strong enough to substantially bring down the large number of unemployed.”
Inflation should remain in check for the immediate future.
Lockhart sees commercial real estate as a risk. “The risk associated with commercial real estate is linked to banks, small business credit, jobs, and ultimately consumption. The overall commercial real estate debt in the financial system is smaller than residential, but it is disproportionately concentrated in small and regional banks. Smaller banks are a significant source of credit for small businesses, and in most recoveries we look to small businesses to generate a significant number of jobs.
“Much hinges on the valuation of commercial properties realized in refinancings and restructurings during the next three or four years. Commercial real estate valuations derive from jobs, among other factors, so you can see the potential for a self-reinforcing dynamic that could be worse than expected,” he said.
Lockhart spoke against “measures that would have the effect of politicizing the central bank—the Fed—and especially decision making on matters of monetary policy.
“Monetary policy has a long-term orientation and often takes effect with lags and interacts with other fundamental, longer-term forces in the economy,” he noted. “In my experience, monetary policy is about setting a course and making periodic adjustments in response to major changes in conditions. Importantly, monetary policy should not swing with the daily news or be influenced by short-term political pressures.”
He continued, “I am concerned that certain legislative proposals could compromise the independence that enables staying on course. I'm referring to the `audit the Fed’ amendments that were passed in the House and introduced in the Senate. The audits would be performed by the Government Accountability Office (GAO). In 1978, Congress thought it wise to exempt monetary policy from GAO review. Congress did this in keeping with established international practice and studied opinion that independent central banks do a better job of keeping prices stable. The effect of these proposals would be to roll back the clear exclusion of monetary policy. The Fed has no argument with audits in the conventional meaning of the term. We're already subject to many audits by the GAO and external auditors. In government, the word `audit’ can be misleading sometimes. GAO audits can amount to full-blown policy reviews. Fed operations outside of monetary policy are already subject to GAO policy review, so this proposal is about ad hoc, after-action reviews of monetary policy, potentially frequent. In my view, this notion is not about transparency and accountability. Both are bedrock principles to which the Fed should continue to be held. Rather, this is about politicizing a process that should remain apolitical.”
