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Fed should be patient, keep trimming U.S. stimulus: Lockhart

Dennis Lockhart, President, Federal Reserve Bank of Atlanta, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Mo
Dennis Lockhart, President, Federal Reserve Bank of Atlanta, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Mo

By Jonathan Spicer

WASHINGTON (Reuters) - It could be another two months before the U.S. Federal Reserve can determine whether recent weak economic data is truly weather-related or something more permanent, so policymakers should keep trimming their bond-buying stimulus, a top Fed official said on Thursday.

In an interview, Atlanta Fed President Dennis Lockhart said flatly that the central bank should keep reducing its policy accommodation even if the February jobs report on Friday falls short of expectations, making for three straight months of sub-par hiring in the world's largest economy.

"In my mind, unless we really fall off track in the economy pretty dramatically, I think the tapering program should proceed," Lockhart told Reuters, adding that he has "modest" expectations for the government's nonfarm payrolls report.

The Labor Department is expected to report on Friday that U.S. businesses added 149,000 jobs in February and the unemployment rate remained unchanged at 6.6 percent, according to a Reuters survey of economists.

That would be an improvement from the prior two months, in which the economy added fewer than 200,000 jobs combined. A weak labor market, along with soft manufacturing and retail sales data, has signaled that the U.S. economic recovery lost some momentum in the early part of 2014.

Lockhart attributed the weak data to the severe winter weather that has gripped much of the United States and issued a word of caution to anyone expecting the Fed to abruptly back off a plan to wind down its bond purchases by later this year.

"Looking at this as a quarter-by-quarter measurement of economic activity and strength, we'll be into the second quarter before we can even complete the call on the first quarter," he said before giving a lecture at Georgetown University, where he taught international business before taking the reins at the Atlanta Fed seven years ago.

"And we'll certainly be in the second quarter before we can become confident that it was an anomaly as a quarter because of weather," he added.

In his lecture, Lockhart said activity could tick up in the second quarter of the year and that he had an optimistic view of the outlook, tipping growth to move back toward a 3 percent annual rate after a soft first quarter.

Answering questions later, he said it would be a concern for policymakers if non-farm payrolls were to come in below 100,000, but added that he personally would not over-react to a low number.

Lockhart, who does not have a vote this year on the Fed's policy-setting panel but participates in its discussions, is considered to be near the center of the central bank's policy spectrum, and his comments often reflect the views of the core decision-makers.

EYEING ASSET BUBBLES, UKRAINE FALLOUT

The Fed has kept interest rates near zero since 2008 and has bought trillions of dollars of Treasuries and mortgage-backed securities to lower borrowing costs and boost investment and hiring following the brutal recession.

But as the economy and labor markets showed improvement late last year, the central bank began in January to reduce its monthly bond purchases and signaled that it plans to phase them out by late in the year.

Monthly purchases now total $65 billion, down from an initial $85 billion, and many economists expect the Fed to continue to trim the pace by $10 billion every six weeks or so.

Lockhart acknowledged that there could be conditions under which the Fed may need to pause or even ramp the bond-buying back up, "but I think the bar is very high ... Certainly, as the balance sheet gets larger the potential costs grow, so I'm not ignoring that, but I don't think the tool should be taken off the table entirely."

Turning to the Fed's other main tool for stimulating hiring and inflation, the promise of low interest rates, Lockhart said he believes the Fed should soon revamp its guidance on how long it will keep rates low. The central bank has for over a year vowed to keep rates near zero until unemployment falls to at least 6.5 percent.

"I would prefer a bit more of a qualitative framework ... that doesn't necessarily tie us to one number," Lockhart said. "I think the closer we get to 6.5 percent, the more it's necessary to refresh the guidance."

He added that he was "very satisfied" that the public's expectations for the first rate increase align with his own, and repeated that he expects that to come in the second half of next year.

"My preference would be to try to preserve the alignment we have now and I don't think that requires dating and I don't think it requires being overly specific," he said. "There's something to be said for keeping it as straightforward as possible."

Meanwhile, the debate is growing within the Fed over whether policymakers should stand ready to tighten to head off any financial instabilities that might grow from all of its accommodative policies, with Fed Chair Janet Yellen saying she would not rule it out as a last resort.

But like many of his colleagues, Lockhart said monetary policy is too "crude" of a tool to address possible asset-price bubbles in particular financial markets or corners of the economy. "It's probably a little bit too much of a blunt instrument for that," he said.

Asked about the simmering crisis in Ukraine, where Russian forces have effectively seized the country's Crimea region, Lockhart said the Fed is watching for geopolitical, financial or economic fallout that could hurt the U.S. economy.

"We live in a world in which things can change very rapidly," said the former banker, who once worked in Lebanon, Saudi Arabia, Greece and Iran.

"Events that are fairly distant geographically from this country can spill over into this economy. You always have to remain vigilant to anything that may turn into a problem."

(Additional reporting and writing by Ann Saphir; Editing by Paul Simao, Dan Grebler and Mohammad Zargham)

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