The Federal Reserve is cognizant of the potential costs of its unconventional policies, but the economic benefits from asset purchases are still far greater than the potential costs, Atlanta Fed President Dennis Lockhart told Reuters in an interview from his offices.
What follows is an edited transcript of the interview.
The December meeting minutes seemed to signal a shift in sentiment at the central bank toward a greater focus on the policy’s costs. How concerned are you about the risks from QE? Has the cost/benefit tradeoff changed for you? What’s your sense of how long you’ll need to keep going?
I would not say at this point that, in any respect, the costs, which are largely longer-term and speculative, outweigh the benefits of maintaining a highly accommodative climate that is being contributed to by both large-scale asset purchases and our interest rate policy. Having said that, I think policymakers have to be aware that in a policy such as quantitative easing or large-scale asset purchases, continuing to build up the challenge of reversal of that policy, or the challenge of normalization, has to be on your mind. I don’t think we’ve gotten to the point where the costs outweigh the benefits. I’m a believer, although of course it’s very hard to isolate cause and effect in the real world, that our policy has benefited the economy and that the improving situation that we are now seeing is at least in part a result of monetary policy.
How does QE3’s effectiveness compare to prior rounds of asset purchases?
Let me first answer that by arguing that each round had a different purpose. The first round had largely a liquidity provision purpose. The second round was, for the most part, to reverse declining inflation expectations that looked dangerous, worrisome. This round, my characterization of it is, to give a boost to the economy, to add to momentum, as it seemed to be emerging from a long period of sluggish growth. So each round in a way was focused on a different kind of problem.
We have a long way to go, particularly in the employment realm, before the economy reaches its full potential. Therefore the continuation of this highly accommodative stance that includes the efforts of quantitative easing, is appropriate, is a sensible policy.