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Banking

Atlanta Fed's Lockhart: Policy Actions Should Be Viewed in Total

photo of Atlanta Fed Chair Dennis LockhartThe Federal Reserve's latest measures aimed at lowering long-term interest rates and supporting mortgage markets are likely to have a modest positive impact, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Sept. 27 speech. Lockhart emphasized that the recently unveiled program is not a stand-alone measure. Rather, he said this move should be seen as augmenting a broader strategy to promote economic recovery and facilitate necessary adjustment.

Reshaping the Fed's balance sheet
Against a backdrop of significant challenges, the Fed's policy-making Federal Open Market Committee (FOMC) on Sept. 21 announced a "maturity extension program." That program will be structured so that over about nine months, the Fed will sell $400 billion of Treasury holdings that mature in three years or less. Meanwhile, the central bank will acquire an equal amount of securities with maturities of six to 30 years. The FOMC also announced plans to buy more mortgage-backed securities (MBS) from Fannie Mae and Freddie Mac, the government-owned backers of mortgage loans.

"In my view, the maturity extension program along with the MBS purchases represents a measured incremental attempt to add more support to the recovery," Lockhart told the World Affairs Council of Jacksonville, Fla. "It's not a fix for everything that ails the economy, but it should help."

Addressing policy impediments
Lockhart said he shares the view that the effectiveness of monetary policy—or monetary policy transmission into the real economy—"remains somewhat impaired."  Lockhart noted some of the impediments to monetary policy transmission: 

  • Many consumers are still paying down debt and are thus unlikely to seek new credit
  • Many large businesses already have substantial cash and therefore are not looking to borrow
  • Loan demand is weak in a soft economy, while stricter credit standards mean fewer potential borrowers qualify for loans.

Other elements of the Fed's strategy include earlier large-scale asset purchases, a conditional commitment to keep the federal funds rate between 0 percent and 0.25 percent at least through mid-2013, and maintaining the total size of the Fed's balance sheet.

"The power and sufficiency of these efforts should not be evaluated individually," Lockhart said, "but as a cumulative total policy of support and accommodation."

October 6, 2011