Evan Soltas
May 21, 2012

Lockhart's Shift

President and Chief Executive Officer Federal Reserve Bank of Atlanta Dennis Lockhart
Dennis Lockhart, the President of the Atlanta Federal Reserve Bank, could very well be the median vote in the Federal Open Market Committee. That makes all the more remarkable his transformation over the last two months; Lockhart has gone from a tightening bias, expecting inflation to return with vigorous recovery, to an accommodating bias, concerned in particular about spillover from Europe.

According to news this morning from Bloomberg, Lockhart said:

As popular as it might be in some quarters to rule out [QE3]...I do not think this option can be taken off the table...QE3 will work under the right circumstances. But I don’t believe such circumstances prevail at this time...[Risks to the U.S. economy] are tilted modesty to the downside [in part because of] recession or very weak growth along with serious fiscal and banking strains in Europe...Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the FOMC’s official target of 2 percent...Those efforts for the time being should fall in the realm of communications.
My hope and feeling is that this view is not just Lockhart speaking for himself, but rather Lockhart plus a couple of the moderate FRB presidents and Governors who had been walking away from the dovish position in the winter of 2012.

In particular, they're looking at things like equity markets, which have turned south as they did before the growth slowdowns in 2010 and 2011. They're looking, obviously, at the conditions and Europe -- recognizing that while recession is unlikely to spill over, financial panic most definitely will. What they're not looking at, or assessing with less weight in other words, is the last quarter's data. That's a notable shift from their position only a few weeks ago, which interpreted that growth as representative of a general acceleration in the rate of growth of economic activity. Now, given the seasonal adjustment issues and intra-quarter weakening of conditions, Q4 2011 and Q1 2012 data is considered with increasing wariness.

Only a few weeks ago, at the start of May, Lockhart had said:

I'm a bit reticent at this point to pull the trigger on any new action. (1)

The Fed’s already done a lot to support the recovery...Whether additional monetary policy actions should be used at this time to try to speed things up has to be balanced against the risks to the Fed’s price stability objective that could accompany an overestimating of the amount of economic slack. [i.e., no.] (2)

At the start of April, Lockhart:
[I would have to] see some pretty severe circumstances before I endorse for another round of quantitative easing.
And in March, Lockhart had been a bull, the headline in Bloomberg "Lockhart Says More Bond Buying Would Pose Risk Inflation Will Rise":
I’m cautious about doing more involving expansion of the Fed’s balance sheet...Precisely because I see the transmission mechanism of monetary policy through credit channels as constricted, I have my doubts that the gains from such a policy action taken in the near term would outweigh the longer-term potential costs, including the risk to the Fed’s medium-term inflation outlook...The onset of recessionary conditions and movement in the direction of deflation [would be appropriate conditions for QE3]...I continue to think the benefits of the low rate policy outweigh the costs...A realistic assessment of the challenges associated with closing the employment gap call for sustained extraordinary support for what is, like it or not, a gradual process...While growth is proceeding at a moderate pace, the question of sustainability continues to hang in the air...There remain significant levels of unused and underutilized resources in the economy, especially human resources.
Although I don't think the solution is QE3, the shifting position of Dennis Lockhart signals that the Fed's  inappropriate bullishness is being moderated by what it recognizes as a worsening economic environment and outlook for the next few quarters.