In a speech today in Mississippi, Atlanta Fed President Dennis Lockhart reviewed the state of the nation’s recovery from the financial meltdown of 2008-2009, telling his audience that the difference between US GDP and its potential could be as high as 5.5% and as low as zero:
If the true output gap is near 5.5 percent, there is ample reason to do something with the policy levers that are available. But if the output gap is actually close to zero, policy stimulus will be counterproductive and could do harm in the longer run.
The harm could come from expanding the Fed’s balance sheet to the point where inflation above the Fed’s target of around 2% would kick in. But he notes, the Fed’s authority to pay interest on excess reserves gives it “the ability to push up interest rates by lifting the interest on excess reserve rates, thereby countering credit expansion and money expansion.”
Even conceding that more monetary stimulus would be beneficial and that balance sheet risks are manageable, will more stimulus actually achieve the goal of getting the US economy growing again? Messing around with interest rates won’t help much, Lockhart says, so policymakers (read, Senators and Representatives, and the President) “ought to push harder on policy levers.” Lockhart continues:
Elevated levels of joblessness have been very persistent and the burdens of the very weak job market have been particularly harsh for the segments of our population where job attachment is already most tenuous—the young, minorities, and those at lower income levels.
Lockhart dismisses the claim that US unemployment is due to structural changes in the economy, and also says he believes that the output gap is between the high and low values. He also says that there are limits to the effectiveness of more monetary stimulus:
On the likely effectiveness of further monetary stimulus—a policy that would necessarily be brought to bear at least in part through credit channels—I think we should have modest expectations about what further action can accomplish. I do not think this means monetary policy is impotent or has reached its limit. But I don’t see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank’s purview.
Lockhart concludes by saying that his support for current Fed policy depends on a current forecast of both output and job growth by the end of the year and into 2013:
If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it.
In other words, the Congress and the President need to get to work.
A copy of Lockhart’s speech is available here.