Fed's Lockhart: keep policy 'very accommodative'

MONTGOMERY, Alabama Tue Nov 12, 2013 1:44pm EST

MONTGOMERY, Alabama (Reuters) - U.S. monetary policy ought to stay "very accommodative" to foster job creation amid tepid growth, a senior Federal Reserve official said on Tuesday, warning that inflation was too low and this was raising concerns about the durability of the recovery.

Atlanta Federal Reserve President Dennis Lockhart also said last month's government shutdown may undermine the reliability of economic data through December, hinting at another reason not to expect policy action when Fed officials gather on December 17-18.

"Monetary policy overall should remain very accommodative for quite some time," he said in remarks prepared for delivery to a business and economic conference.

"Even though the economy is growing, and we're making progress on unemployment, there are real concerns about whether the recent modest pace of GDP (gross domestic product) growth is enough to maintain employment momentum," he said.

Lockhart, a policy centrist who is usually viewed as a good indicator of the consensus among senior officials, is not a voting member of the central bank's policy-setting committee this year.

His dovish comments are likely to strengthen expectations that the central bank will not taper its asset purchase program until next year.

The Fed is buying bonds at a pace of $85 billion per month while promising to hold interest rates near zero, at least until unemployment hits a threshold of 6.5 percent, providing the outlook for inflation stays under 2.5 percent. The jobless rate was 7.3 percent in October.

However, officials have signaled they would like to start scaling back asset purchases, also called quantitative easing, when this is warranted by stronger data on growth and hiring.

Economists think the Fed may try to offset any negative reaction in financial markets to this tapering announcement by also lowering the unemployment threshold to 6 percent. Lockhart did not spell this out, but his remarks went in that direction.

"The mix of tools we use to provide ongoing monetary stimulus may change, but any changes will not represent a fundamental shift of policy," he said.

He also made pointed remarks about low inflation and warned about the failure of inflation to climb back toward the Fed's 2 percent target.

"Inflation is too low. A persistent low rate of inflation raises concerns about a stalling out of economic expansion," he said, although he thought it was premature to be alarmed about the danger of a damaging bout of deflation.

(Reporting by Jonathan Spicer; Writing by Alister Bull; Editing by Chizu Nomiyama)

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