Highlights: Fed's Lockhart talks to Reuters

ATLANTA Thu Jun 9, 2011 6:09pm EDT

ATLANTA (Reuters) - Atlanta Federal Reserve Bank President Dennis Lockhart told Reuters on Thursday the U.S. central bank does not need to come to the economy's aid with another round of bond purchases.

In the interview, Lockhart said maintaining an easy Fed policy stance should ensure the moderate U.S. recovery does not fall off the rails.

Following are highlights from the interview.

Has weaker economic data affected your forecasts?

"We have revised down our full-year forecast. It's largely arithmetic. We had a first half weaker than we had expected. Our outlook had been very moderate all along so the revisions we have made are not terribly substantial. The basic theme of our forecast remains the same. We expect the second quarter to come in at about the first-quarter level revised up or slightly better. And then my outlook is that there will be some improvement on that in the second half. That outlook carries with it a bit more risk than we perceived coming into the year."

Why not embark on another round of bond purchases?

"I don't think QE3 will be necessary. I think we're going to see this modest, moderate but continuing pace of growth that doesn't require further stimulus. Secondly, the stance of policy is at the moment very stimulative. Simply maintaining that stance of policy for some period of time should be sufficient support for a continuing recovery. I would also have concerns about diminishing returns to further stimulus when many of the headwinds to growth are not fundamentally addressable by monetary tools. Interest rates are very low. So you would have to ask yourself the question, what would you achieve if you laid on another QE3 program of significant size? What you would do, that I have some concern about, is bulk up the balance sheet even further, making the eventual removal of stimulus, or the eventual reversal of policy, all the more challenging."

How high would the bar be for further Fed easing?

It would take "a significant deterioration as reflected in the overall economy, a set of deflationary signals and also unemployment numbers that rise dramatically. Last fall (when the Fed launched QE2), by some measures, we were seeing declining inflation expectations that were headed in a pretty negative direction, and that was happening pretty rapidly. We were in a disinflationary environment. So the risk of deflation was plausible. We acted and the situation has turned around. That was, at least in my way of thinking, very central to supporting the policy. We don't have anything remotely like a deflationary risk at the moment, short of a shock of some kind."

Is political opposition to bond-buying affecting Fed decisions?

"I have every confidence that the committee will evaluate the situation, decide what to do, and act on it, operating as an independent central bank. And you're referring I think to the reaction to QE2. I don't see that as a factor."

Is there anything else the Fed can do to boost employment?

"Monetary policy (aims ) to support the recovery, try to create the conditions for the optimal level of macroeconomic growth that has the effect of improving the employment picture, while maintaining low and stable prices. We really don't have the ability to target micro-markets or mismatches of supply and demand in the economy, or aspects of the employment problem that are macro in nature."

What did you make of May's grim employment report?

"We had had a series of months during which net job creation exceed 200,000. At that level, we can make some progress, but below that level we don't make much progress on the formal unemployment rate. I think it's a little early to interpret one month's numbers, so I'm reluctant to say a new trend has developed that is a lower trend on employment. But certainly it's a disappointing number."

What is your outlook for U.S. inflation?

"I don't think what we've seen recently, with the rather quick reversal of headline inflation and also a fairly strong upper movement in core inflation -- I don't think that's indicative of a long-term inflationary trend and therefore those effects will abate."

Do you see the fight over the debt limit in Congress as a risk to markets?

"I think it's a very serious policy matter. But I am confident that the responsible thing will be done, and that is the treatment of the debt ceiling. I think what is important is a credible road map that is by nature multi-year to a fiscal balance that is acceptable to capital markets and is fundamentally sound. What is important at the moment is to raise the debt ceiling and develop that plan."

Has Japan's earthquake and tsunami had a substantial impact on the U.S. economy?

"There has been a discernible overall effect. This is among the factors that have contributed to the slowing in the first half. But I think it's a temporary factor. Among the several reasons why the second half could be better is that whatever effect there is, is likely to be reduced in the second half. There are not going to be persistent supply chain problems from Japan."

What are the implications for the United States of Europe's ongoing debt troubles?

"The exposure of the U.S. financial system to the peripheral countries that are most at risk of default is quite low. So it's hard for me to see any significant direct spillover effect even if there were a default, directly on our financial system. Certainly if that were to happen it could contribute to a continued slowdown in Europe which would not be good for the global economy and would not be good for the United States. It's important to get a resolution."

(Reporting by Pedro Nicolaci da Costa)

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