–Not Ruling Out More Stimulus But Depends On How Economy Evolves
–Less Concerned About Risk From Europe To U.S. Economy

By Brai Odion-Esene

WASHINGTON (MNI) – While recent U.S. economic data has been
encouraging, the Federal Reserve must maintain its current monetary
policy stance, given current risks to the recovery, like Iran-related
tensions, and the fact that several sectors remain “quite weak,” Atlanta
Federal Reserve Bank President Dennis Lockhart said Friday.

This does not mean he is advocating more monetary stimulus —
so-called QE3 — he said in remarks to students at Georgetown
University. Lockhart is a voter on the Fed’s policymaking Federal Open
Market Committee this year.

He said the credit system “isn’t working as efficiently as it can,
and therefore I have some reservations about employing more
accommodative or more stimulative policies to try to push it through a
transmission mechanism that needs to be repaired before it is fully
receptive to more stimulus.”

And despite the recent bout of positive data, Lockhart cautioned
against overstating the strength of the recovery and the current health
of the economy.

It is important that the FOMC does not tighten monetary policy
“prematurely or inadvertently,” Lockhart said, and the committee is
working very hard to ensure there are no “misinterpretations” of its
message.

He warned that “it’s appropriate to be cautiously optimistic about
the future, but not overweening about the health of the economy.” “The
directions are positive but not necessarily back to where we would like
to see them.”

“The directions, in general, are pretty positive. The levels of
activity in a number of areas are still quite weak,” he said.

These include, not surprisingly, the housing sector and the labor
markets.

Lockhart also pointed to risks related to tensions over Iran’s
nuclear ambitions, which he said “are on my radar screen.” This poses a
risk to the recovery, Lockhart said, and means maintaining accommodative
monetary policy is “sensible.”

As for whether more stimulus in the form of additional quantitative
easing is needed or not, Lockhart said his position is one of “patient
vigilance.”

“I want to see how the economy evolves before drawing conclusions
that more stimulus is needed,” he said. “I don’t rule it out, we
certainly have the tools to do more if the Federal Open Market Committee
decides that conditions are such that the economy needs more stimulus.”

Although urging a wait-and-see approach, Lockhart said the economy
appears to be gaining some “traction,” noting that incoming indicates
conditions are getting “better and better.”

Lockhart said he expects growth this year to be between 2.5% to 3%.
As for prices, he said headline inflation is “spiking a bit” because of
gasoline prices.

As a result, “We expect that we are going to see, and have already
seen some indication — at the headline level — of higher inflation,”
he said.

Excluding the volatile food and energy components, however, “the
underlying inflation picture is more benign than what you would get by
just reading the short-term headlines,” he said.

So looking at inflation more broadly, Lockhart said the current
pace is consistent with his definition of “a reasonable performance”
around the Fed’s now explicit annual inflation target of 2%.

“Consequently, I’m pretty confident that the inflation picture is
in a satisfactory range,” Lockhart declared.

There has been recent “encouraging news” on the labor front and the
recent increases in job creation should positively impact the
unemployment rate, he continued, while consumer activity is “holding
up.”

Lockhart said he agreed with comments by Fed Chairman Ben Bernanke
that more consumer activity is needed to maintain the recovery’s
momentum, and described the current growth in consumer spending as
“modest.”

Measures of consumer confidence have been “reasonably buoyant,” he
continued, with the public becoming more confident about the economic
outlook.

Business investment continues to grow “at a nice pace” as well, he
said, adding that the anecdotal evidence the Atlanta Fed receive from
local businesses “is really pretty upbeat.”

Lockhart was also more bullish in his outlook for Europe, saying
the risk of contagion in Europe’s financial system spread to the U.S.
has lessened, especially given the recent restructuring of Greek debt
and the approval of a second round of aid for the debt-laden nation.

Also, the cheap 3-year loans provided to Europe’s banks by the
European Central Bank mean he is also “much less concerned” about the
state of the EU banking system.

And while this does not mean the risk posed by the euro area has
disappeared, it has abated “somewhat,” he said.

“I am less concerned today than I would have been some months ago
about that there could be a serious effect on the U.S. economy coming
out of Europe,” Lockhart said.

Europe’s issue now, he continued, is about improving conditions to
support economic growth.

** MNI Washington Bureau: 202-371-2121 **

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