–Current Pol Support Rests On Forecast Of Output,Job Growth By Year-End
–Monetary Policy Not Impotent Nor Has It Reached Its Limit
–Should Have Modest Expectations Of What Further Action Can Accomplish

By Brai Odion-Esene

JACKSON, Mississippi (MNI) – If the U.S. economy continues along
its present weak path, as indicated by recent economic indicators, then
the current stance of monetary policy will become “untenable,” Atlanta
Fed President Dennis Lockhart said Friday.

In remarks prepared for the Mississippi Economic Council Lockhart
also said the risks related to further expansion of the Fed’s balance
sheet are “manageable,” but cautioned that expectations for what
additional action by the central bank could accomplish should be
“modest.”

Lockhart, a voter on the Fed’s policymaking Federal Open Market
Committee this year, said a compelling case has not yet been made that
structural adjustment has played “a dominant role” in slowing economic
activity and job growth.

However, “Elevated levels of joblessness have been very persistent
and the burdens of the very weak job market have been particularly
harsh,” he said.

“And to make a broader point, I am concerned that the already
significant long-term jobless problem may harden into something more
structural,” Lockhart added.

Lockhart said he voted in favor of the $267 billion extension of
the Fed’s ‘Operation Twist’ program at the June FOMC meeting, but
stressed that his support for current monetary policy rests on a
forecast that sees a step-up of output and employment growth by year-end
and into 2013.

But recent data has shown the economy only added 80,000 jobs last
month and that U.S. manufacturing activity contracted as well.

“I think the stakes in the policy discussion around the FOMC table
today are very high,” Lockhart said, with the steering group faced with
deciding whether or not to respond more aggressively “to the economy’s
apparent weakness.”

“It’s possible another policy decision looms,” he said. “If the
economy continues on the track indicated by the most recent incoming
data and information, that forecast will become untenable, as will the
policy premises underlying it.”

Lockhart noted that he and his colleagues at the Atlanta Fed have
“recalibrated” their risk evaluation, and are now acknowledging “darker
possibilities.”

“Risks associated with developments in Europe, the so-called fiscal
cliff here in the United States, and a global economic slowdown have
weighed more heavily on our outlook,” he said.

While some worry about the risks associated with a further
expansion of the Fed’s already swollen balance sheet, Lockhart argued
that, in his opinion, “some further use of the balance sheet to promote
continued recovery and/or financial stability brings with it manageable
risks.”

“I think reversal of the cumulative balance sheet scale and
maturity structure can be accomplished in an orderly manner,” he said.

Lockhart said he does not believe that monetary policy is
“impotent” or has reached it limit. However, “I think we should have
modest expectations about what further action can accomplish,” he said.

The decision to engage in additional balance sheet expansion should
be undertaken “very judiciously” he counseled, stressing that monetary
policy cannot be a miracle cure — especially in the absence of action
by fiscal authorities.

** MNI **

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