By Steven K. Beckner
CHARLOTTE, NC (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Tuesday said he would be reluctant to back a tightening of
monetary policy in America’s uncertain economic climate unless it became
“absolutely necessary” to curb inflation.
Lockhart, who will be voting on the Fed’s policymaking Federal Open
Market Committee next year, said he would support a monetary tightening
if the recent more rapid pace of inflation persists, but said that is
not likely.
Meanwhile, he said the economy is in “quite ambiguous”
circumstances in wake of a May employment report which he called
“clearly disappointing.”
At the same, though, he expressed confidence in the economy’s
longer term prognosis and reminded his luncheon audience that recoveries
are rarely smooth.
Lockhart also came out for an explicit inflation target to aid Fed
communication of its objectives in remarks prepared for delivery to the
Charlotte Economics Club.
After observing that overall inflation has been running at a 5%
annualized rate, Lockhart said, “I would not hesitate to support an exit
from our current policy stance if I believed that the headline inflation
number of the past six months is really indicative of the underlying
trend inflation rate.”
But he said, “I don’t believe this to be the case.”
“And I am wary of tightening monetary policy in the face of quite
ambiguous economic circumstances unless doing so is absolutely necessary
to meet the FOMC’s price stability mandate,” he added.
Lockhart was echoing the sentiments of other officials, including
Fed sources quoted by MNI after last Friday’s employment report, which
showed a meager 54,000 non-farm payroll gain and a rise in the
unemployment rate to 9.1%.
Monday night, Dallas Fed President Richard Fisher, an FOMC voter
this year, told a Market News International seminar in New York that the
Fed might have to “temper the pace” of any exit from its easy money
policies depending on the extent to which the economy improves from its
recent slump.
Lockhart prefaced his even more explicit policy comments by saying
that “significant improvement in the labor market has been slow to come”
and that “last Friday’s employment report was clearly disappointing.”
He pointed out that “recoveries rarely play out smoothly” and that
“economic fluctuations are to be expected in a dynamic economy like
ours, even in the absence of externally originated shocks and scares, of
which there have been several.”
He cited Europe’s debt problems, the leap in oil prices, natural
disasters in Japan and their effect on the U.S. auto manufacturing
sector, domestic weather events, the “continuing severe weakness of the
housing sector” and “our own version of fiscal uncertainty.”
In face of all these adverse forces, Lockhart said “the fluctuating
nature of economic performance is not really a surprise … . Recent
disappointing incoming data are not a reason to panic, in my view. In
fact, the economy has shown pretty impressive resilience through a
litany of what are hardly ordinary and predictable developments.”
Still, Lockhart said he is “troubled by what you might describe as
a lack of conviction in this economy,” although he said that going
forward the economy should get a boost from three fundamentals: “1) the
restored health of the financial-especially banking-sector, 2)
stabilized public sector fiscal underpinnings at all levels of
government, and 3) sustained low and stable inflation.”
Lockhart said he has also been perturbed by the “exceptionally
volatile” behavior of prices. After a spate of concern about potential
deflation that led to a resumption of quantitative easing last November,
he noted there has been a “swift” reversal to accelerating inflation.
Because of uncertainty about inflation and about the divergence
between core and headline inflation, Lockhart joined other colleagues
who have advocated an explicit, numerical inflation target.
“Now is a good time to reaffirm in explicit terms the central
bank’s commitment to delivering its piece of the package of fundamentals
needed to assure a durable and lasting recovery,” he said.
Lockhart enunciated three principles that should govern the design
of such a target:
* “First, it would be stated in terms of some measure of overall,
or headline, inflation.”
* “Second, the target must be achievable over a realistic
timeframe. That time horizon should be short enough to serve the real
interests of the public and short enough to serve as a verifiable check
on central bank performance.”
* Third. “Since monetary policy actions do not have an impact on
the economy instantaneously, the time horizon should be long enough for
the objective to be realized at an acceptable cost. I also accept that
there will be times we must allow short-run deviations from the targeted
rate of headline inflation, and the stated objective should be
constructed with this in mind.”
Lockhart said the establishment of an inflation target would not
produce much change in how the Federal Reserve conducts policy. “We have
been pursuing policies with an eye toward 2% or slightly less headline
inflation at least since we began publicly reporting our longer-term
inflation forecasts.”
And he added, “I don’t see an appropriately constructed inflation
target as being in conflict with the FOMC’s mandate to support
employment.”
** Market News International **
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