Lockhart: Fiscal Situation Could Complicate Monetary Policy

Lockhart: Fiscal Situation Could Complicate Monetary Policy

Atlanta Fed President LockhartIf 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
At the University of Virginia Investing Conference, Lockhart described the Fed's current monetary policy stance as "very accommodative, very aggressive." He expressed confidence that the central bank's policy actions to support economic recovery will ultimately work, citing positive signs in manufacturing activity, consumer spending, the housing market, and employment.

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"
Even that humble expansion would likely be threatened if the fiscal situation is mishandled. Lockhart cited Congressional Budget Office estimates that going over the fiscal cliff would knock 2 percentage points off gross domestic product (GDP) growth and raise unemployment to 9.3 percent. It is presently at 7.9 percent. Already, in discussions with and surveys of businesspeople, Atlanta Fed officials have detected what Lockhart called a "fiscal cliff drag" on economic activity.

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