Fed's Lockhart sees QE taper talk on table in December

Fri Nov 22, 2013 9:22am EST

Dennis Lockhart, President, Federal Reserve Bank of Atlanta, takes part in a panel discussion titled ''Twist and Shout: The Limits of U.S. Monetary Policy'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012 file photo. REUTERS/Danny Moloshok

Dennis Lockhart, President, Federal Reserve Bank of Atlanta, takes part in a panel discussion titled ''Twist and Shout: The Limits of U.S. Monetary Policy'' at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012 file photo.

Credit: Reuters/Danny Moloshok

(Reuters) - Debate over reducing the pace of the Federal Reserve's massive bond buying program will be "on the table" at its next policy meeting in December, the president of the Atlanta Federal Reserve said Friday.

Dennis Lockhart, in an interview on CNBC, said he expected the Federal Open Market Committee, the central bank's policy-setting arm, to be debating when to begin cutting back on its program of $85 billion a month in bond purchases over the next several meetings. The committee next meets on December 17-18.

Lockhart, who will not be a voting member of the FOMC until 2015, said he expects the exit from the program, known as quantitative easing, to be manageable when the time comes.

Even after the bank starts winding down QE, monetary policy is likely to be very accommodative for quite some time, likely for years, Lockhart said.

Recent polls by Reuters indicate a majority of economists and financial market analysts do not expect a "tapering" of the QE program to begin until the first quarter of next year.

Lockhart is considered to be a centrist among the bank's panel of 19 monetary policy-makers and his views are often seen as reflecting the consensus among senior Fed officials.

The Fed is now engaged in its third full-out round of QE asset purchases, which are designed to flood the banking system with cash to promote credit growth and boost the economy and employment. Since the first program's launch in late 2008, the Fed has amassed a balance sheet that now totals more than $3.86 trillion, the latest Fed data shows.

The series of QE programs followed the Fed's slashing of its core interest rate to near zero in response to the financial crisis that erupted after the collapse of investment bank Lehman Brothers. That rate, which is the Fed's traditional tool for providing or reducing stimulus to the economy, is expected to remain near zero for some time.

Lockhart voted in favor of the latest leg of the QE program when the FOMC launched it in September 2012, initially with a target of $40 billion of mortgage bond purchases a month. He was also a "yes" vote at the December 2012 meeting when the program was expanded to include the monthly acquisition of $45 billion of long-term Treasuries as well.

In the CNBC interview, Lockhart said he believes the net impact of the Fed's asset purchases has been positive, and that "quite a bit of progress" had been made to help spur job growth and reduce unemployment. Since the launch of QE3, the U.S. economy has added nearly 2.5 million jobs, and the unemployment rate has fallen from 7.8 percent to 7.3 percent.

U.S. economic growth has remained sluggish, but Lockhart said he expects the pace to pick up in 2014.

Critics of the Fed's QE program worry that it is creating asset bubbles and risks stoking runaway inflation at some point. By reducing the supply of safe assets such as Treasuries, the Fed's program has forced investors to buy riskier assets such as stocks, which have enjoyed a robust rally under the program.

Lockhart agreed that a fair amount of uncertainty persists about the long-term consequences of QE, but he contended "we're not in danger zone now."

The larger the Fed's balance sheet gets, the more the Fed is dealing with an unknown factor, but the program's benefits are outweighing its costs, he said.

Lockhart said he is an advocate of changing the mix of policy tools the Fed has been relying upon and that he is confident the bank can assemble a mix of tools to preserve its accommodative policy for some time to come.

(Reporting by Tim Ahmann; Writing By Dan Burns; Editing by Chizu Nomiyama)

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