June 5, 2009 / 1:01 PM / 10 years ago

Fed's Lockhart: Can't wait too long to tighten

WASHINGTON (Reuters) - The Federal Reserve needs to be “anticipatory” and not wait too long to tighten monetary policy, Atlanta Fed President Dennis Lockhart said in an interview published on Friday.

“We’re not there yet,” he told Market News International.

Lockhart said that with rising market concerns about inflation, he could envision the Fed eventually raising U.S. benchmark interest rates while continuing to run an expansionary monetary policy.

The Fed has cut rates to near zero and pumped money into the financial system to revive lending and pull the economy out of a deep recession.

Lockhart is a voter on the Fed’s policy-setting Federal Open Market Committee, which meets June 23-24.

Recent economic data suggest the economy may be stabilizing, raising some nervousness that the Fed’s policies, if not pulled back soon, could sow the seeds of dangerous inflation.

The U.S. central bank could buy even more long-term securities in response to a jump in long-term bond yields, Lockhart said. The Fed in March announced it would buy up to $300 billion in longer-term Treasury securities to improve conditions in credit markets.

Lockhart said there could be drawbacks to buying longer-term Treasury securities, but that he has not made up his mind on the issue.

The Fed needs to “maintain” its balance sheet as shorter-term assets diminish, Lockhart said. The Fed’s balance sheet is swollen with securities it has taken on in exchange for the money it has pumped into financial markets as part of its aggressive strategies to restore calm.

Minutes of the Fed’s April 28-29 meeting showed that in spite of signs of a thaw, some officials believed expanding purchases of Treasuries and other securities might be needed to accelerate the pace of recovery.

Some market participants expect the Fed to expand those purchases to help tamp down bond yields, which jumped as high as 3.90 percent on Friday after the government reported a much smaller-than-expected drop in March payrolls, adding to signs economic decline may be slowing.

Reporting by Mark Felsenthal; Editing by James Dalgleish and Dan Grebler

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