Lockhart: Fiscal Situation Could Complicate Monetary Policy
If Congress and the executive branch do not resolve the looming federal budget impasse, widely termed the "fiscal cliff," the result could be a recession that creates tension between monetary and fiscal policy, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a November 16 speech.
Current policy is sparking recovery
He added, however, that the nation's job market does not appear close to substantial improvement. "So in spite of some signs of firming in the overall economy," Lockhart said, "I'm holding to a base case outlook that has real growth only modestly above a 2 percent growth trend."
Atlanta Fed's already noticed "fiscal cliff drag"
Plunging over the metaphorical cliff, Lockhart said, would likely hamper the Fed's monetary policy work. For one, the Fed's open-ended asset purchase program is designed to end when economic conditions warrant, notably when there is "substantial improvement" in the outlook for the labor market. Failure to resolve the fiscal stalemate might set back improvement in the labor market outlook and the general economy.
"While the Fed could extend the period of time over which monetary policy accommodation is required, monetary policy would not be able to make up for the body blow to the economy that ‘going over the cliff' would represent," Lockhart said.
November 28, 2012