Banking

The Federal Reserve's plan approved this month to buy $600 billion in Treasury notes will incrementally increase overall demand in the economy and has already lowered the risk of deflation, Atlanta Fed President Dennis Lockhart said in a Nov. 16 speech.

Furthering the Fed's dual mandate
Lockhart told the Alabama World Affairs Council in Montgomery that the large-scale asset purchases also are designed to improve financial conditions and thereby support a faster recovery and speed the achievement of the Fed's two statutory mandates—maximum employment and price stability. The purchases can affect the economy in several ways.

"For example, the sellers of Treasuries will have more funds available to buy goods and services," Lockhart said. "Or they may buy other assets like corporate bonds or shares. Doing so will tend to push up the prices of those assets, making the people who own them either directly or, through their investment funds, better off."

He acknowledged that the Federal Open Market Committee decision in early November to purchase securities has been controversial at home and abroad. For instance, some critics have argued that the asset purchases will stoke inflation by increasing the money supply. Others have said the purchases are intended to devalue the dollar and therefore make U.S. exports less expensive to overseas buyers.

"Ordinarily in my remarks I would defer to the U.S. Treasury Department on matters related to the dollar," he stated. "That said, I don't think it is out of line to state clearly that, as I see it, there is no monetary policy intent to engineer specific values—or even a direction—for the dollar." Lockhart added that the perceived risk of sparking inflation with the asset purchase program must be weighed against the risk of inaction, the primary one being a "recessionary relapse possibly tipping into a long spell of deflation."

Anticipating a measured recovery
Turning to the economic outlook, the Atlanta Fed president said he expects the recovery to strengthen in the coming year, although not sufficiently to rapidly return income and employment to prerecession levels. The recovery is still restrained by several factors, Lockhart noted. Those factors include a cautious credit environment, ongoing debt repayment by businesses and individuals, a depressed housing market, and difficult restructuring in the commercial real estate sector. He added that the percent of household income going to service their financial obligations is at the lowest level in a decade as people reduce debt and credit usage.

November 23, 2010