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Atlanta Fed President Lockhart: Accommodative Policy Needed "For Quite Some Time"

Atlanta Fed Pres. LockhartThe economy and labor market have improved, but that doesn't mean the Fed's monetary policy stimulus is no longer needed, said Atlanta Fed President Dennis Lockhart during a November 8 speech in Oxford, Mississippi. Although the mix of policy tools employed by the Federal Open Market Committee (FOMC) may evolve, "any change will not represent a fundamental policy shift," he said.

Forward guidance influences rates
The FOMC's main policy lever, the federal funds rate, has been near zero since 2008. The FOMC has also issued forward guidance—communications about how long and under what circumstances it will keep the ultra-low rates in place—which helps push down longer-term interest rates. Also, in September 2012 the FOMC announced that it would buy $85 billion in longer-term assets—U.S. Treasury securities and mortgage-backed bonds—until the outlook for employment improved substantially.

Labor markets have improved significantly since then. In the past year, the unemployment rate has fallen from 7.9 percent to 7.3 percent in October, and the economy has added 2.3 million jobs. "This is a good story, and an important story," Lockhart noted. Still, he pointed to several other labor market indicators that are "less satisfactory." Long-term unemployment remains at historically high levels, and too many people are working part time when they'd rather have full-time employment.

Lockhart also expressed concern about whether labor markets would continue to improve at the current pace. "Even though the economy is growing, and we're making progress on unemployment, there are real concerns about whether the recent modest pace of GDP growth is enough to maintain employment momentum," he said.

Watching inflation closely
Meanwhile, the other half of the Fed's dual mandate—inflation—is well below the FOMC's goal of 2 percent. Although concerns about high inflation tend to occupy the headlines, "a persistent rate of low inflation raises concerns about a stalling out of economic expansion," he explained.

Lockhart shared a cautiously optimistic outlook for 2014. Although his baseline outlook calls for stronger growth in the range of 2.5 percent to 3 percent, he tempered his optimism by noting, "At this juncture, I can't fully discount the possibility that the expected economic improvement won't materialize and that we'll see a replay of the weak growth of the past three years. This possibility is an influence on my thinking about the appropriate direction of monetary policy." Further, even if growth does gain speed, there is still a chance that inflation and employment could fall short of the Fed's goals, he said. "Therefore, monetary policy overall should remain very accommodative for quite some time."

November 25, 2013


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