Friday, April 26, 2013

UPDATE 1-Fed's Lockhart says inflation will be "easily recognizable"

By Alister Bull

April 13 (Reuters) - U.S. inflation is under control and is going to stay that way because the Federal Reserve will "easily" spot the conditions that could erode price stability, and has the tools to tighten policy when needed, a top U.S. central banker said on Saturday.

Atlanta Federal Reserve President Dennis Lockhart acknowledged that inflation expectations might be fanned by rapid credit growth as the economy picked up steam, as a result of the aggressive actions taken by the central bank.

"That chemistry is not at work today," he told a panel on fiscal policy at The University of Iowa School of Law, in Iowa City. "I'm confident those improving conditions will be easily recognizable and the committee has a variety of tools to counter inflationary pressures with tightening measures."

The Fed has held interest rates near zero since late 2008 and tripled the size of its balance sheet to around $3 trillion through massive bond purchases aimed at holding down longer-term borrowing costs to boost investment and hiring.

Lockhart, who is viewed as a policy centrist and therefore a good gauge of the consensus among Fed leaders, is not a voting member this year of the central bank's policy-setting Federal Open Market Committee (FOMC).

He shared the Iowa panel with Allan Meltzer, a respected economist and historian of the Federal Reserve, who has been an outspoken critic of its dramatic actions to put the U.S. economy on a sounder footing. Lockhart stood his ground.

"We are navigating in uncharted waters...but I am convinced we are weighing the benefits of the policy against the possible longer-term costs in a balanced way," he said.

Some critics say bond buying by the Fed has funded explosive deficit spending by President Barack Obama. But Lockhart rejected that accusation.

"A low cost of borrowing for the federal government is a by-product of a policy of nursing the economy back to full health and with success, the ultra-low interest rate conditions are likely to give way to higher rates, whether or not the government is borrowing," he said.

He also noted international investors continued to view U.S. financial markets as a "safe haven", in an indication that they did not regard the Fed's actions as undermining the long-term outlook for the nation's prospects.

"The dollar is in fact strengthening and investors do not seem to be overly concerned that the FOMC's policies will stoke inflation over the longer term," he said.


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