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Banking

Lockhart Explains Support for Monetary Policy Moves

photo of Atlanta Fed Chair LockhartSlowing economic growth and stubbornly high unemployment justified the Federal Open Market Committee's (FOMC) decision this month to enact further monetary policy accommodation in support of the nation's economic recovery, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech on September 21.

"For me," Lockhart told the Atlanta Institute of Internal Auditors, "the policy question was what tools in combination have the greatest chance of producing real results in terms of faster growth and employment gains while preserving price stability."

Fed using multiple approaches
The FOMC has indeed deployed a combination of tools. Lockhart reviewed the key elements of the FOMC accommodation announced September 13—highlighted by the decision to purchase $40 billion a month of agency mortgage-backed securities (MBS)—and put those in the context of the cumulative monetary measures the committee has deployed thus far.

Those measures include:

  • The federal funds rate has been at a range of 0 percent to 0.25 percent since December 2008, and in a series of communications the FOMC has indicated the policy rate would likely stay that low at least through mid-2015.
  • In the statement following the September 12–13 meeting, the committee reinforced the rate guidance by explaining that the low rate policy will likely remain even after the economy shows signs of reviving, provided the inflation outlook remains calm.
  • The FOMC has expanded its balance sheet from about $900 billion at the end of 2007 to roughly $2.9 trillion. This increase resulted from emergency lending during the 2008 financial crisis—two rounds of large-scale asset purchases with a third initiated this month.

MBS purchases well-timed
This month's FOMC actions represent a "forceful attempt" to improve the economic outlook, Lockhart said. "I supported the package of policy measures because I believe together they will help," he explained. "The necessary natural healing from the large disruption of the financial crisis will certainly be supported, and likely accelerated, by the stance of policy with the new features introduced last week."

Lockhart said the MBS purchase program is timely in light of recent improvement in the housing market. The Fed securities purchases should keep downward pressure on mortgage rates and thus stimulate home buying, helping to raise home prices. Rising home prices should, in turn, contribute to consumer confidence.&

"An improving housing sector will help calm one headwind that has impeded a stronger recovery," Lockhart said.

September 26, 2012