WRAPUP 1-Fed’s Lockhart eyes easing of $100 bln a month

* Fed’s Lockhart: QE2 has to be big enough to have impact

* Monthly $100 bln would be in the range – Lockhart

* Fed’s Evans says desirable to increase accommodation

* Fed’s Dudley says economic situation “unsatisfactory”

By Mark Felsenthal

WASHINGTON, Oct 19 (BestGrowthStock) – A top U.S. Federal Reserve
official said on Tuesday further monetary easing by the central
bank must be hefty enough to spur recovery and securities
purchases of $100 billion a month could be in order to achieve
the necessary impact.

Three Fed officials on Tuesday made the case for further
easing and bolstered perceptions a consensus has grown at the
central bank to launch a fresh round of large-scale asset
purchases at a meeting on Nov. 2-3.

Atlanta Federal Reserve Bank President Dennis Lockhart, a
policy centrist who has grown increasingly worried about
deflation risks, repeated that he was leaning toward further
easing and offered the most specific outline of the possible
scope of further central bank bond buying.

“If we’re going to pursue another round of quantitative
easing, it has to be a large enough number to make a
difference,” Lockhart said in an interview on CNBC.

“As a monthly number ($100 billion) is fairly consistent
with what we did before, and so I think it would certainly be
in the range of numbers one might consider … but if you were
talking about $100 billion as simply the overall program, I
think that’s too small,” he said.

The Fed cut rates to near zero in December of 2008 and
followed that with $1.7 trillion in purchases of Treasuries and
mortgage-related debt, a program that concluded in March.

However, the Fed acknowledged over the summer that the U.S.
economic recovery could need further help and many analysts
expect officials to buy up a further $500 billion in U.S.
government debt.

Prospects for further Fed easing have weakend the U.S.
dollar in recent weeks and caused worry in emerging markets
that their soaring currencies will make exports uncompetitive.

Comments from two other Fed officials belonging to the camp
that has consistently favored easing added to signs the Fed was
close to acting.

“Viewed through the lens of the Federal Reserve’s dual
mandate — the pursuit of the highest level of employment
consistent with price stability, the current situation is
wholly unsatisfactory,” said New York Fed President William
Dudley, reiterating an argument he made earlier this month.
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Chicago Fed chief Charles Evans also backed more monetary
stimulus and repeated his call for a price-level target, saying
that there was little chance the U.S. unemployment rate, now at
9.6 percent, would fall below 8 percent by 2012.
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Dudley is a permanent voter on the Fed’s policy-setting
panel, while Evans moves into a voting slot next year. Lockhart
won’t have a vote on monetary policy until 2012.

BENEFITS OUTWEIGH RISKS

Lockhart said more easing was warranted despite the risk
the Fed’s already bloated portfolio could pose a dangerous
inflation risk when the recovery eventually gains traction.

“I think the risks associated with it are acceptable,”
Lockhart said. “Quantitative easing will help improve a
recovery that is going very slowly and improve the trajectory
of the economy overall.”

A report on Monday showed U.S. industrial output shrank
last month for the first time in more than a year, a sign the
economy remained stuck in a slow-growth rut. While a report on
Tuesday showed U.S. housing starts hit a five-month high in
September, permits for future building fell.

U.S. government debt prices were flat as the Fed officials’
comments suggested further easing is on the way, offsetting
solid bank earnings and the better-than-expected housing data.

The Fed’s easy monetary policy, which pushed the dollar to
a 10-month low against a broad basket of currencies on Friday,
has drawn the ire of emerging market economies contending with
a flood of capital as investors chase higher yields. However,
the dollar rose on Tuesday after a surprise Chinese central
bank interest rate increase.

Lockhart, expressing a view widely held at the Fed, said
the U.S. central bank’s priority is to revive the domestic
economy.

“The Treasury Department takes responsibility for the
exchange value of the dollar, and we at the Fed and on the
(policy-setting) Federal Open Market Committee are just looking
at the health of the domestic economy,” he said.

With the prospect of a prolonged period of high
unemployment and already slowing inflation, Fed officials have
become concerned a debilitating deflation could set in unless
they can spur a stronger recovery.

Dudley said it would likely take several years to bring
unemployment down and push inflation up into ranges the Fed
would be more comfortable with.

Given deflation risks, Evans said it would make sense for
the Fed to put in place a so-called price-level target that
would have it shoot for above-target inflation to make up for
falling short of the mark now.

“Economic theory tells us that in such circumstances
monetary policy should aim to lower the real, or
inflation-adjusted, rate of interest by temporarily allowing
inflation to rise above its long-run path,” Evans said. “In my
opinion, such a strategy is entirely appropriate.”

WRAPUP 1-Fed’s Lockhart eyes easing of $100 bln a month