Fed’s Lockhart: Recession Risks Rising, QE3 Possible

Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, tried speaking out of both sides of his mouth on Monday in public comments concerning the outlook for the U.S. economy and monetary policy.

In a speech at the Rotary Club of Florence, Alabama, Lockhart stated that “At the Atlanta Fed, we have revised down our near and intermediate gross domestic product growth forecast, but we are holding to the view that the economy will continue to grow at a very modest pace.  In other words, we do not expect the onset of outright contraction — a recession — but I have to say the risk of recession is higher than we perceived a month or two ago.”

Lockhart went on to say that “If additional actions are required, I can assure you the Federal Reserve is not out of bullets.  Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view.  These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory.”

The Atlanta Fed President did not specify the potential size of any balance sheet expansion, which would likely come in the form of a third round of quantitative easing (QE3).

However, he also noted that “I’m currently cautious about further monetary action.  I still maintain that a resumption of growth is the most likely case.  But if that assessment proves to be wrong, I believe we do have tools to address whatever circumstances arise.”

Lockhart is not presently a voting member of the Federal Open Market Committee (FOMC), but is scheduled to become one in 2012.

The full text of Lockhart’s speech is available here:

http://www.frbatlanta.org/news/speeches/110815_lockhart.cfm