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Fed's Lockhart Sees Bond Buying Through Much Of 2013

01/17/2013 | 02:08pm US/Eastern

(Adds comments throughout)

   By Michael S. Derby 

NEW YORK--The Federal Reserve will likely press forward with its bond buying efforts for much of the year, a key central bank official said Thursday.

"My own sense of this is that it's probably going to be a struggle to see by midyear" the needed level of progress in the job market to bring asset buying to a conclusion, Federal Reserve Bank of Atlanta President Dennis Lockhart said at the Bloomberg Global Markets Summit here.

"I would tend to believe this bond purchasing will need to continue longer into the year" as a result, and "where it goes beyond that is a question the [Federal Open Market Committee] will take up," the official said.

Mr. Lockhart was a voting member at last year's FOMC meetings, but he won't have that status when the Fed's monetary policy setting arm meets this year. The central banker has been a consistent supporter of Fed actions to support the economy, although he said in a speech Monday he is decidedly wary about some of the risks that come with the continued buying by the Fed of mortgage and Treasury bonds.

Most expect the central bank to press forward with those purchases as the year progresses, as it maintains its zero percent interest rate stance. Fed policy is aimed at making borrowing costs cheaper in a bid to drive up growth and lower the unemployment rate. Inflation under the Fed's official 2% target gives the central bank the latitude to act, as officials see it.

The veteran policymaker spoke to reporters after his formal remarks and praised the central bank's adoption of unemployment and inflation thresholds that aim to provide greater guidance into the factors that will drive monetary policy.

Instead of committing to keep interest rates very low until a fixed calendar date, the central bank now says it will keep rates effectively near zero percent until the unemployment rate ebbs to at least 6.5%, so long as expected inflation doesn't go half a percentage point above the Fed's 2% target.

"I think the transition is successful" to the new regime and "I don't sense there's been an adverse reaction" among financial markets and other observers of monetary policy, Mr. Lockhart said. He also said that thresholds suggest no increase in short term rates until the middle of 2015, consistent with the now abandoned calendar date guidance, but he added the new system can adjust to changing economic data.

In both his audience discussion and in his interaction with reporters, Mr. Lockhart offered thoughts about the dollar's value, a subject Fed officials are usually hesitant to address. He countered those who believe the Fed's very aggressive policy is weakening the dollar in a way that hurts other nations.

"I'm not sure the evidence really supports the view that quantitative easing has in fact affected the exchange value of the dollar," Mr. Lockhart said. "It's hard to look at short term evidence" and say moves in the dollar result from central bank policy, he said, adding that in any case Fed actions are targeted as U.S. economic performance, and the dollar's value is "not something that's a first priority."

Mr. Lockhart also countered those who worry expansive Fed policies have fueled, or will soon fuel, a surge in inflation. "You don't see an indication inflation has gotten out of control" and price expectations remain "well anchored," the Fed official said. "It's hard for me to come to the conclusion...there's an immediate risk" of a break out on the prices front.

The official also noted that when the Fed seeks to keep price pressure in line with its 2% target, it is dealing with overall prices, and not specific sectors. He said that while many people are confronting higher food and energy prices, those changes are relative, and from the Fed's point of view, "there is no such thing as energy inflation, or food inflation."

On the economy, Mr. Lockhart said it's hard to see where the economy will find the fuel to grow significantly more quickly this year, but he noted a resolution to the nation's ongoing government spending dramas could help bring a better-than-expected activity gain. The policymaker said he was also hopeful that a rebounding housing sector recovery will continue.

Write to Michael S. Derby at michael.derby@dowjones.com

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