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Banking

Atlanta Fed's Lockhart Voices Support for Quantitative Easing

The current state of the U.S. economy has Atlanta Fed president and chief executive officer Dennis Lockhart wondering, "Is this the best we can achieve?" With U.S. unemployment at 9.6 percent and inflation measures stable but rather low, the economy is clearly "not where we want it to be," he said in an October 18 speech in Savannah, Ga.

Atlanta Fed President Dennis Lockhart

As a result, Lockhart and other Fed policymakers are now weighing the benefits and risks of further action. More specifically, a second round of quantitative easing—popularly termed QE2—has been discussed as a tool to jumpstart the sluggish economy.

The Fed last embarked on a program of large asset purchases from late 2008 until the spring of 2010. During that period, the Fed bought $1.25 trillion of mortgage-backed securities, $300 billion of Treasury securities, and $175 billion of agency debt securities.

QE2 among leading options
"If something is to be done about the state of the economy, quantitative easing is the leading option," Lockhart told the Savannah Rotary Club. Nevertheless, the use of this policy tool has possible benefits and risks associated with it. Another round of quantitative easing could help stimulate purchases and investment and help boost exports, he explained. On the other hand, he expressed concern that the additional stimulus would have a limited effect and could cause inflation expectations to increase.

Although the decision is far from being clear-cut, Lockhart voiced his support for further action.  "At this juncture, and given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation leading to deflation. In my mind, QE2 is a form of risk management—an insurance policy that is prudent to put in place at this time," he explained.

Pondering an inflation objective
Lockhart also expressed support for another move—the adoption of a more explicit inflation objective by the FOMC—that he believes would "strengthen the effect and compensate for potential risks of the policy action."

October 28, 2010