UPDATE 1-Fed’s Lockhart says not yet time to raise rates

(Recasts, adds detail, comment)

By Pedro Nicolaci da Costa

STONE MOUNTAIN, Ga., April 6 (Reuters) – The U.S. economy
remains too fragile for the Federal Reserve to begin raising
interest rates, the president of the Atlanta Fed, Dennis
Lockhart, said on Wednesday.

Lockhart reiterated that the Fed will complete its $600
billion bond-buying plan as scheduled at the end of June,
adding that he not seen sufficiently compelling evidence to cut
the program short.

Asked about hints from minutes of the Fed’s last policy
meeting that some of his colleagues had started to think about
hiking interest rates before the end of this year, Lockhart
said at the moment he was not inclined to think that would be
needed.

“There is still a degree of fragility in how this recovery
is evolving,” Lockhart, who was in Stone Mountain, Georgia, for
a conference of the Atlanta Fed, told reporters. “I just don’t
think it is yet the right time to reverse course.”

The U.S. economy expanded 3.1 percent in the fourth
quarter. Unemployment has come down rapidly in recent months
but remains at an elevated 8.8 percent.

Lockhart said inflation was still not a major concern and
argued that the recent uptick in prices was actually a desired
outcome for policymakers, many of whom had been worried about
the potential for a deflationary spiral late last year.

Echoing the message of Fed Chairman Ben Bernanke, Lockhart
argued the recent spike in commodity prices was due to supply
and demand factors rather than the Fed’s loose monetary policy.
Many emerging market policymakers have criticized the Fed for
fueling rapid capital inflows into emerging market securities
and currencies.

Lockhart said he expects commodity prices to stabilize, and
underlying inflation trends to remain subdued.

“The core numbers are still somewhat below what I think is
the informal target that the consensus of the committee of
around 2 percent,” Lockhart said, referring to closely watched
readings of inflation that exclude food and energy prices.

“Inflation expectations short term are reflecting gasoline
price movements and have risen somewhat,” he added. “But longer
term they’re more stable and in a zone that I think is
reasonably healthy.”

Crude oil prices this week hit 2-1/2-year highs, and U.S.
corn futures hit record highs.

Lockhart said he had not yet sketched out an exact vision
of how he would like the U.S. central bank to exit its loose
monetary policy, but said the Fed would consider a rather
aggressive exit strategy proposal by Philadelphia Fed President
Charles Plosser “very seriously.”

One step central bank officials could eventually take,
Lockhart said, might be to no longer reinvest the proceeds of
maturing mortgage bonds back into Treasury securities, as is
currently the case.

“We have the option to employ some passive shrinking of the
balance sheet for some period of time,” Lockhart said. “I think
it’s possible that passive shrinking might be associated with
something you might call a kind of pause in which interest
rates would remain low while some shrinking of the balance
sheet takes place.”

UPDATE 1-Fed’s Lockhart says not yet time to raise rates