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 Dennis Lockhart, president of the Federal Reserve Bank of Atlanta,
also suggested the central bank should clarify its future plans for
raising interest rates now that U.S. unemployment has dropped to 6.7
percent — close to the Fed's stated threshold of 6.5 percent for
considering tighter policy.
In a speech on what 2014 may hold for the economy, he said "very
accommodative" monetary policy remains appropriate despite his
predictions for a pick-up in economic growth and a gradual rise in
inflation this year.
"If all goes as expected, there is a policy transition under way
from a QE world, so to speak, to a post-QE world," he said using the
initials for the Fed's bond-buying program, known as quantitative
easing.
But "both the employment picture and the inflation state of affairs
have worrisome aspects," he added in remarks to the Rotary Club of
Atlanta.
In a nod to better jobs growth, the Fed last month announced it
would trim its asset purchases to $75 billion per month, from $85
billion, starting in January. Those purchases, along with near zero
interest rates, are meant to spur investment and spending that will
boost hiring and growth.
Chairman Ben Bernanke has suggested the Fed would take similar,
measured steps to wind down the purchases throughout the year — which most economists have taken to mean agreeing to further taper
its bond buying in $10 billion increments at each policy meeting.
Lockhart, a centrist at the central bank who does not have a vote on
monetary policy this year, predicted 2.5 to 3.0 percent gross
domestic product growth this year, up a bit from 2013. If that plays
out, he said he would support "similar tapering steps over the
course of this year."
U.S. unemployment sharply dropped to 6.7 percent in December from
7.0 percent. But "the labor market is not as healthy as the improved
unemployment rate might indicate," Lockhart said. "The unemployment
rate drop may overstate progress achieved."
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Highlighting weak wage growth and a high degree of labor market
dropouts, he added there remained a "substantial employment gap"
that could be helped by easy Fed policies.
As for inflation, Lockhart said it "seems disconnected from the
recent growth momentum," and warned that "continued disinflation
could pose risks to economic performance."
The Fed has said it will keep rates at rock bottom well past the
time unemployment falls below 6.5 percent, especially if inflation
remains below its 2 percent target.
The drop in joblessness poses a problem for the Fed's so-called
forward guidance, Lockhart told reporters afterward.
"I think the 6.5 percent (threshold) is not serving as well now as
it may have served earlier when we were a fair distance away..." he
said, "and it now requires substantially more explanation and for
that matter more interpretation of what the number actually is
signaling."
Lockhart did not advocate lowering the threshold, as have some other
Fed officials.
(Reporting by Karen Jacobs; writing by
Jonathan Spicer; editing by Andrea Ricci and Alden Bentley)
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