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Lockhart: Too Early to Raise Rates

Thursday, 27 Aug 2009 09:50 AM

The U.S. economy is in the early stages of a recovery but it is premature to start considering raising interest rates, a top Federal Reserve policymaker said on Wednesday.

"I would not speculate on the timing. I would simply say that it is too early to be contemplating a rise in the fed funds target," Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters after a speech here.

He was referring to the U.S. central bank's overnight lending benchmark, which is currently pegged between zero and 25 basis points.

Some critics fear this ultra-low rate, together with the billions of dollars the Fed has flooded into credit markets to stop them seizing up last year during a global financial panic, means it should tighten policy sooner rather than later.

"I am in the camp that believes that because of a somewhat subdued, if not lackluster recovery, that it would be advisable to be patient with that," he said.

Lockhart, a voting member of the Fed's policy-setting committee this year, was speaking after addressing the Chattanooga, Tennessee, Area Chamber of Commerce.

The Fed has doubled its balance sheet to around $2 trillion since the September collapse of investment bank Lehman Brothers pushed the financial system to the brink of failure.

Lockhart said that he expects the balance sheet to start to shrink of its own accord next year as bank demand for emergency Fed lending facilities eases.

But he did not favor expanding Fed purchases of mortgage agency debt at this stage, although he did not rule it out if warranted, and was open-minded about tapering off the $1.45 trillion buying program rather than letting it end on December 31, 2009 as currently is the Fed's stated plan.

"The central issue is what we call the cliff effect ... stopping a program abruptly without signaling to markets a tapering off," he said.

"I am personally aware of and concerned that market distortions could ensue from a poorly communicated exit from the MBS (mortgage backed securities) program, so I think it is very important that we condition the markets for whatever policy we chose to follow," he said.

Lockhart said in his earlier remarks that an economic recovery was in its early stages, but cautioned against expecting growth to quickly lower high U.S. unemployment.

"My forecast for a slow recovery implies a protracted period of high unemployment," Lockhart said.

U.S. unemployment stood at 9.4 percent in July and is expected to peak at 10 percent later this year as companies slash payrolls in the face of the longest recession since the 1930s Great Depression.

Lockhart said he expected inflation to remain contained, but also acknowledged that policymakers could not afford to leave stimulative policies in place for too long.

"The challenge my colleagues and I face is navigating between the risk that early removal of monetary stimulus snuffs out the recovery and the risk that protracted monetary accommodation stokes inflation expectations that could ultimately fuel unwelcome inflationary pressures," he said.

"The Fed must deal with this tension, particularly in coming quarters, as we pursue our dual mandate of price stability and maximum employment," Lockhart added.

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The U.S. economy is in the early stages of a recovery but it is premature to start considering raising interest rates, a top Federal Reserve policymaker said on Wednesday."I would not speculate on the timing. I would simply say that it is too early to be contemplating a...
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