More purposeful confusion out of the Fed this morning after Fed's Fisher just hit the tape saying he may vote to end QE2 before the June deadline, even as Lockhart says QE3 is possible if the US faces another downturn. The purpose of all this constant conflicting disinformation is to keep market participants on edge as the marginal economic improvement is finally starting to reverse as Goldman's Jan Hatzius insinuated last night. In other words, should the Libyan conflict not be resolved for another few weeks, QE3 is pretty much guaranteed.
Uprisings in the Middle East and North Africa have increased U.S. economic uncertainty, and Federal Reserve policy-makers should not rule out further bond purchases if things worsen, a top central bank official said on Monday.
"My first inclination is to be very cautious about extending asset purchases after June," Atlanta Federal Reserve Bank President Dennis Lockhart told a conference sponsored by the National Association for Business Economics.
"Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options," he said.
This includes a need for policy-makers to remain vigilant against the prospect that recent spikes in commodity and energy prices, which are making businesses and consumers nervous, do not give rise to an inflationary psychology, Lockhart said.
And the highlights from Lockhart's speech delivered to the NABE Policy Conference:
Lockhart thinks that the economy is demonstrating moderate strength and the pace of growth is accelerating somewhat. He expects a sustained pace of growth in the range of 3 to 4 percent, inflation firming to a trend rate around 2 percent, and gradual employment growth in the next one to two years.
In Lockhart's view, the balance of risks has shifted with the unrest in the Middle East and Africa. His base case forecast sees continuing improvement, but with concern about growth downsides and price upsides. Given the emergence of new risks, Lockhart prefers a posture of flexibility regarding policy options.
Lockhart thinks about the desirability of another round of large-scale asset purchases and an exit to a less accommodative policy stance within a framework that emphasizes forward-looking rules that depend on forecasts. First and foremost, he will be looking for signs of emerging price pressures. He will continue to monitor various inflation indicators, including median and trimmed-mean measures of core inflation, measures of inflation expectations, and a "sticky-price" index. Lockhart recommends renewed focus on monetary and credit aggregates.
Lockhart believes that Fed independence on monetary policy remains an essential feature of sound economic policymaking.
Full speech here.