Fed bond buying not big policy shift: Lockhart

By Pedro Nicolaci da Costa

JOHNSON CITY, Tennessee (BestGrowthStock) – The Federal Reserve’s decision to begin buying Treasuries again was a “precautionary” step, not the opening salvo in a new policy course, Atlanta Fed President Dennis Lockhart said on Friday.

Lockhart said markets overreacted to the decision, reading a major worsening into the Fed’s view of the world that had not taken place.

“I think the decision has been overinterpreted in some quarters,” Lockhart said at an event sponsored by Eastern Tennessee State University. “I do not believe this change necessarily heralds the beginning of a period of further expansion of the Fed’s balance sheet.”

Last month, the U.S. central bank began reinvesting proceeds from maturing mortgage bonds in its portfolio into Treasury bonds, an effort to keep reserve bank credit from shrinking as the securities come due.

He noted that officials were worried lower mortgage rates would speed up prepayments and increase the rate of shrinkage in the Fed’s balance sheet.

Describing fears of deflation and a possible double-dip recession as “alarmist,” Lockhart acknowledged that a weak job market was taking a toll on consumer spending.

A Friday government report showed a slight rise in the unemployment rate to 9.6 percent during August, but payrolls shrank less than economists expected and the private sector added 67,000 jobs.

Asked whether the Fed would need to expand its balance sheet further by buying even more Treasuries, Lockhart said: “At this time I don’t have a view on that. We’ll have to watch the evolution of the economy and the conditions that develop.”

“I would not rule it out as a response to weaker conditions than I am forecasting,” he added.

THE GOOD NEWS

Lockhart argued that despite risks, the economy was still on a sustainable path to growth, and things would “look and feel” better by the end of the year. He described a recent softening in the data as a “temporary downshift.”

He cited many pockets of good news in the economy, including this week’s manufacturing survey from the Institute for Supply Management that showed an unexpectedly robust rate of expansion.

Business investment in equipment and software was also strong, Lockhart said. He noted that the balance sheets of corporations have been repaired since the overleveraged depths of the financial crisis.

“My basic view of the economy has not changed, but my perception of risks has shifted somewhat to the downside,” Lockhart said.

“The economy has slowed somewhat, but remains on a gradual recovery track.”

Fed bond buying not big policy shift: Lockhart