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Atlanta Fed President Lockhart Addresses Debate on Further Easing

photo of Atlanta Fed President LockhartAfter explaining the Federal Open Market Committee's (FOMC) June decision to extend the maturity extension program commonly referred to as "Operation Twist," Atlanta Fed President Dennis Lockhart told the Mississippi Economic Council on July 13 that another high-stakes policy decision could loom—whether to respond more aggressively to the economy's apparent weakness.

Considering dual viewpoints
Lockhart said two general views have emerged on that question. One theory is that the current outlook calls for action immediately, or soon. The opposing view is that while more monetary stimulus can't be dismissed as an option, it should be set aside unless the economic outlook gets much worse, Lockhart said in Mississippi's capital city of Jackson.

But there are other considerations before taking a side in that debate, Lockhart said. "Before taking a position on this two-sided question, it's my view that one has to wrestle with three sub-issues," he said.

The issues he cited are:

  • Determining the size of the "output gap." This term refers to the difference between actual and potential economic performance. It's hard to quantify that gap accurately, Lockhart noted. And quantifying the output gap is important because the bigger the gap, the more reason there is to enact more policy action, he reasoned.
  • Deciding whether expanding the Fed's balance sheet even further, and essentially putting more money into the economy, might stoke inflation.
  • And finally, considering whether further monetary stimulus will do any good.

Lockhart offers his view
After laying out those three questions, Lockhart offered his answers. First, he believes the output gap is not as large as some estimates of around 5.5 percent, but also not zero, as some observers also claim. "Deciding on the extent of the output gap is not straightforward," he said. "I believe the truth is in the gray middle."

Second, he believes the Fed's policymaking FOMC can manage the risks that would come from further use of the Fed balance sheet to promote continued recovery or financial stability. He added that more expansion of the balance sheet "should be undertaken very judiciously. Such a step would take us further into uncharted territory."

On the third question regarding the effectiveness of more policy action, Lockhart advises "modest expectations." "I do not think this means monetary policy is impotent or has reached its limit," he said. "But I don't see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank's purview."

July 26, 2012

 

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