Tags: Lockhart | Fed | Purchases | Deflation

Lockhart May Back Fed Purchases to Head Off Deflation

Monday, 18 October 2010 01:45 PM

Atlanta Federal Reserve President Dennis Lockhart said he may back a second round of purchases of Treasury securities by the central bank to ensure against the possibility of falling prices.

More so-called quantitative easing “is a form of risk management — an insurance policy that is prudent to put in place at this time,” Lockhart said today to the Savannah Rotary Club. “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.”

Lockhart’s comments echoed the view of Fed Chairman Ben S. Bernanke, who last week said additional monetary stimulus may be warranted because inflation is too slow and unemployment is too high.

The Fed is considering the purchase of more Treasury securities and efforts to boost inflation expectations to stimulate the economy and reduce unemployment persisting near 10 percent, according to minutes of the Sept. 21 meeting of policy makers released last week. The central bank was prepared to ease monetary policy “before long,” the minutes said.

“I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present,” Lockhart said. He also said he favors adopting a more explicit inflation target as a way to reduce the deflation risk.

“The fact that growth is so sluggish and inflation so near zero presents the possibility of a deflationary situation developing, with very serious implications for employment,” Lockhart said. “We want to avoid deflationary territory.”

‘Feed on Itself’

“Deflation can feed on itself, turning into a deflationary spiral,” he said. “This possibility is by no means my base case expectation, but I don’t think it can be blithely dismissed.”

Lockhart repeated his view that the third quarter’s growth measurement will be sluggish, similar to the second quarter, with a pickup next year.

“My current forecast sees a modest increase in the rate of growth in the fourth quarter and further, but still modest, improvement in 2011,” he said. “In this forecast, inflation remains low but with no further disinflation and unemployment comes down very gradually.”

Economic growth decelerated to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first quarter and 5 percent in the last three months of 2009, according to the Commerce Department.

‘Somewhat Below’

The central bank after its Sept. 21 meeting said inflation is “somewhat below” levels consistent with its congressional mandate for stable prices. The Fed said it was “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Inflation, measured by the personal consumption expenditures price index, minus food and energy, has been below the Fed’s goal for five consecutive months. The price measure rose 1.4 percent for the 12 months ending August. Prices excluding food and energy have gained at a 1 percent annual pace in the three months through August.

The Fed’s goal has been to keep inflation rising annually at around 1.7 percent to 2 percent.

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Atlanta Federal Reserve President Dennis Lockhart said he may back a second round of purchases of Treasury securities by the central bank to ensure against the possibility of falling prices.More so-called quantitative easing is a form of risk management an insurance...
Monday, 18 October 2010 01:45 PM
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