–Expects Moderate Growth in U.S. if No External Shocks

By Daniel Horch

SAO PAULO (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart said Monday it “remains an open question” whether monetary
policymakers can do more to help the U.S. economy.

Speaking at the Fundacao Getulio Vargas business school, Lockhart
described various measures monetary policymakers had taken to date, but
said “monetary policy alone cannot fix the problem” and he was
“disappointed” in the failure of Congress to address fiscal policy.

Despite all the Fed’s efforts, some of which” remains to be felt in
the coming months,” due to the lag in monetary policy, “All that adds up
to a very accommodative stance of policy, and yet we are still
challenged, particularly by the unemployment rate, to think through
whether there are ways and a requirement to do more. And I think that
remains an open question.”

But Lockhart, who will be a voting member of the policy-setting
Federal Open Market Committee next year, also said “there are further
measures that are possible.

“I would say because we have already done a lot in monetary policy,
it is reasonable to say, policy options more limited than they were,” he
said, “but we certainly have some options,” including “the option to add
more liquidity to the system.”

But Lockhart said his “personal opinion” is “there should be a very
high bar to further quantitative easing,” with possible requirements
including the economy returning into recession, an increase in
unemployment or the threat of deflation.

But he said “the mortgage-backed securities purchases option” which
“would either be used in conjunction with the maturity extension program
or hypothetically in a QE3 program … is a legitimate idea that
deserves discussion by the whole committee.”

In response to a question from MNI as to additional policy tools
available, Lockhart said “short of another round of large scale asset
purchases, there are various ways to communicate with the broad public
and the markets, as to where policy is likely to go.”

Lockhart portrayed the current state of the U.S. economy as
“growing at a moderate pace,” with fourth quarter growth likely to be
“3% or a little better.”

He cited two “principle risks” to the U.S. economy, from the
sovereign debt crisis in Europe and “uncertainty about fiscal adjustment
in the U.S.”

He called the U.S. economy “somewhat vulnerable” to shocks from
Europe, with the risks to the financial system coming not from direct
exposure, but the indirect impact of a possible global financial crisis,
while the failure of Congress to agree on fiscal policy could “add to
the confidence drag that is currently already at work in the U.S.
economy.”

But he said “excluding an external shock, I see no risk of a
recession” and he expects moderate growth, of 2% to 3% and inflation
around 2%, while the unemployment rate comes down gradually.

In response to a question about the Fed accepting higher inflation
than its “informal target” of around 2%, he said “I cannot see that
policy option getting any support at all.”

Lockhart also said he thought “the natural rate of unemployment, if
we could achieve it, is higher than what we were experiencing before the
recession,” when unemployment was likely below its natural level.

He said the American consumer would likely take “months or years”
to recover while “the dollar’s competitiveness has led to rather strong
exports.”

** Market News International Sao Paulo **

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