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Lockhart on Why Monetary Policy Isn't Doing More
The Federal Open Market Committee has kept the fed funds rate at almost zero since December 2008, and it has taken other steps aimed at spurring the economy. Yet the recovery has been inconsistent. At the Federal Reserve Bank of Atlanta's Banking Outlook conference on March 1, Atlanta Fed President Dennis Lockhart explained some of the reasons why accommodative monetary policy has so far not had more of an impact than it has.
Lockhart also believes the policy of low rates outweigh the costs, especially as the recovery is still gaining traction. He thinks the challenges of closing the employment gap call for this kind of sustained support for "what is, like it or not, a gradual process."
Lockhart focused his remarks on what is known as the transmission mechanism of monetary policy—the way the policy works its way into the real economy so that it can have the desired effect. In the case of lower rates and other forms of accommodative policy, the aim is to stimulate borrowing, spending, hiring, and overall economic growth.
Banking system important part of monetary policy channel
Small companies as a group, however, are struggling and worried about future revenue growth. These firms tend to be wary about taking on additional debt. Consumers, meanwhile, are by and large still trying to pay down debt rather than taking on more.
Many factors limiting credit supply as well as demand
"Long story short," Lockhart said, "low funding costs and abundant bank reserves produced by monetary policy still have not resulted in significant, broad-based loan growth." He noted that new data show that loan demand is beginning to pick up.