Atlanta Federal Reserve Bank President Dennis Lockhart said Wednesday he expects tapering of the Fed’s asset purchase program to continue at the $10 billion-per-meeting pace, and ending by the fourth quarter of this year.
“Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year,” Lockhart said in a speech prepared for delivery to the Rotary Club.
Lockhart said the pace of tapering is dependent on the economy “staying substantially on track” and could be adjusted as the year goes on “if economic conditions change a whole lot.”
But, he added, “given my current views on the economy, I like the current positioning of policy.”
The Fed’s policymaking Federal Open Market Committee decided at its January meeting to reduce the total purchases of Treasuries and agency mortgage-backed securities by another $10 billion to $65 billion each month following a similar cut in December.
“Notwithstanding the decision to taper asset purchases, the stance of policy remains very accommodative,” said Lockhart, who will vote on the FOMC in 2015.
The Fed’s monetary policy position is “in the right place for now, in my opinion,” he said.
The FOMC also changed the language in its forward guidance to say interest rates will stay low “well past” when unemployment reaches its 6.5% threshold if inflation is headed towards its 2% target.
That means short-term interest rates are quite low, and “in my own outlook, they will remain low for quite some time,” Lockhart said. “I expect the Fed’s policy rate to stay put until well into 2015.”
In his current baseline outlook for the economy, Lockhart projects “inflation to gradually rise to around 2%, reaching that rate toward the end of 2015.”
With the decision to pull back on large scale asset purchase dependent on the economy, Lockhart said policymakers should be be patient and “not too quick to respond to zigs and zags in the data.”
He pointed to the disappointing 74,000 net jobs created in December, and “some not-so-great numbers in the first quarter of this year.” He said the first quarter GDP growth “may be affected by weather events as well as the inventory cycle” after the economy grew 3.2% in the last quarter of 2014.
“We’re still dealing with sizeable gaps in terms of overall output, inflation, and employment. If inflation were running above 2 percent, my diagnosis might have to be more nuanced, but today, the three gaps taken together suggest there remains a fair amount of slack in the economy,” he said.
Lockhart cautioned that “it’s hard to discern with absolute precision the track the economy is on. Incoming data are rarely unambiguously positive or negative. Data are always messy. Policymakers are challenged to separate true signal from noise and to decide how much weight to put on the arrival of disappointing data reports.”
That is where the need for patience comes in. “In my view, the Committee should stay the course and let more clarity emerge on the sustainability of the recent pickup in growth, the path of inflation relative to the 2 percent target, and the nature of the employment situation,” he said.
Still, Lockhart said he thinks fundamentals of the economy have improved and “the economy is likely to continue to perform in a higher gear over the full-year 2014.”
On the employment gap, Lockhart said it is difficult to analyze what is what is cyclical and what is structural, reiterating sentiments expressed Tuesday by his colleague, Chicago Fed President Charles Evans.
“Much progress has been achieved in lowering the unemployment rate since the end of the recession,” he said. “In fact, the unemployment rate has fallen faster than many forecasters expected.”
Lockhart continued: “If the decline in labor force participation is due to structural changes – such as population aging – that is one thing. Monetary policy cannot do much about the fact that we are getting older as a nation.”
But, he said, “it is an entirely different matter if people are not participating in the labor market due to cyclical conditions.”
With the employment situation hard to read, “readings of inflation can be especially informative,” he said. “In general, we expect weak demand to be associated with weak prices.”
Therefore, he added, “watching inflation and wage growth closely will help us gauge whether we’re getting the basic economic strength needed to improve the more complicated employment situation.”