–Issue Of Int On Excess Reserves ‘Not Resolved;Might Come Up Again
–Remains ‘Open Minded’

By Yali N’Diaye

JACKSONVILLE, Fla. (MNI) – The discussion on lowering the interest
on excess reserves has yet to be resolved within the Federal Open Market
Committee, Atlanta Federal Reserve Bank President Dennis Lockhart said
Tuesday, adding he would only expect a marginal positive impact from
using this tool.

He will, however, keep an “open minded” approach should the
Committee reopen the discussion at the next meeting, he said in
answering audience questions following a speech before the World Affairs
Council in Jacksonville.

“It is certainly a policy option to reduce or eliminate all
together the interest on excess reserves and that particular issue
obviously,” he said, “was not resolved and may come up again.”

Yet he expressed concerns that using this policy tool might only
produce “slight positive effects.”

“I’m not terribly optimistic that it would make a big impact,” he
said. “It might have some positive effect on the margin and I will
remain open minded as we go into the next meeting,” should the topic
come up.

“But it’s hard for me as a former banker,” he continued, “to be
convinced that the difference between 25 basis points on reserves and a
punitive interest rate on a real loan out there in the economy means
that the interest on reserves are a disincentive to lend.”

He noted that bankers reported weakness of loan demand and are
“very eager” to find qualified borrowers.

And reviving loan demand will come from a revived economic
activity.

On that front, Lockhart repeated he does not believe a double-dip
recession will happen.

Regarding inflation, he stressed the importance to keep
expectations anchored, adding he would be “alarmed” if inflation rose
significantly more than the 2% long term implicit target.

Earlier in his speech, Lockhart had stressed that inflation
readings had increased more than desired and more than expected.

Turning to Europe, Lockhart repeated that it is the biggest threat
looming at the moment.

He added that while Greece is small, “it’s hard to ignore” since it
is the focal point of the market.

When asked about German’s commitment to the euro, he noted Germany
is “a great beneficiary of the euro system.” It is also “highly
committed to keeping it together.”

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]