Fed's Lockhart: Fed has tools to rescue economy

By Alister Bull

NEW ORLEANS (Reuters) - The Federal Reserve, despite low interest rates, has the tools to boost growth that will secure an economic recovery in the second half of next year, a top Fed official said on Thursday.

"If current forecasts bracket reality, this quarter and the next one or two are likely to be as bad as it will get. Policy-makers have policy tools remaining to respond to unwelcome surprises," Federal Reserve Bank of Atlanta President Dennis Lockhart told an energy conference.

"The Fed retains a number of options to help ease the economy through this difficult transition," he said, adding that the U.S. central bank could continue to boost market liquidity even though interest rates cannot fall below zero.

Its current benchmark target rate is 1 percent.

He also suggested the Fed would not begin withdrawing its liquidity measures until a recovery was convincingly in place.

"How do we unwind some of what we have done when the time is right to do that? The liquidity facilities ... have expiry dates... Some other aspects of recent policy will have to be considered when conditions change," Lockhart said.

The Fed has slashed interest rates by 4.25 percentage points to 1 percent since September 2007 to limit the damage from a recession that began last December following the collapse of the country's housing market.

"The country, the United States, faces very challenging circumstances. There is little to be encouraged about in recent data. The near term outlook does not, in my view, offer material relief," Lockhart said.

As a result of this grim prognosis, investors expect the U.S. central bank to ease again by at least 50 basis points at its next scheduled meeting on December 15-16. In addition, Fed Chairman Ben Bernanke said earlier this week that it would fire all the arrows in its quiver to get the economy back on track.

This suggested that the Fed would employ unconventional quantitative easing measures alongside traditional interest rate policy to boost the supply and circulation of money and prevent the recession becoming a lasting slump.

Lockhart reinforced this impression in his remarks.

"There are many other mechanisms that the (Federal Open Market Committee) can use to provide liquidity beyond targeting overnight interest rates," he said.

Lockhart, who is not a voting member of the Fed's interest rate-setting committee this year, was speaking at a conference organized by the U.S. Association for Energy Economics and the International Association for Energy Economics.

"Beyond that, the Fed also has the ability to provide liquidity through various facilities, which have been expanded significantly in recent months. Also, the Fed has the ability to work with other central banks and that process of coordination of policy actions is continuing," Lockhart said.

The Fed has provided hundreds of billions of dollars to foreign central banks via currency swap facilities designed to ease pressure on dollar inter-bank lending markets. It also cut its benchmark overnight funds rate by a half percentage point in coordination with other monetary authorities on October 8 in the first such case of joint global monetary policy action.