Lockhart Says Federal Reserve Has More Ammunition for Policy Despite Zero Bound Federal Funds Rate

For immediate release: Jan. 12, 2009

ATLANTA, Ga.—Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, today said he expects Fed policy in 2009 will exert a corrective force on a weak economy.

In his remarks to the Rotary Club of Atlanta, Lockhart said economic conditions are extremely weak and that financial markets remain impaired. "In the banking sector, a posture of risk aversion—or at least caution—persists," he said.

He said Fed policy is focused on containing the impact of the economic downturn and stimulating a recovery as soon as possible. "The lowering of the funds rate target some 525 basis points since September 2007 can be seen as a direct response to worsening economic conditions and the resulting downward revisions to the outlook." While lowering the fed funds rate close to zero, the Fed also has applied creative measures to respond to continuing financial sector problems. He said the introduction of targeted measures has been aimed squarely at the breakdown of credit markets, what he termed "the circulatory system of our modern economy." In his view, "a precondition of economic recovery is the return of the normal functioning of credit markets."

Lockhart noted that there are two aspects of the Fed's new policy approach—growth of the Fed's balance sheet and change in the composition of its assets. "Even with the federal funds rate effectively at zero, there is ample scope to do more of both if conditions require," he said. Lockhart added that the U.S. Treasury also has acted with policies to support growth and noted the incoming administration has proposed a fiscal stimulus.

In response to policy actions, Lockhart said that financial markets have shown signs of improving in recent weeks. He noted the decline of spreads in short-term interbank funding markets, improved conditions in commercial paper and lower mortgage rates in response to the Fed's recent announcement that it would purchase large quantities of mortgage-backed securities and agency debt. "Without a willingness to use all available tools and to adapt policy tools as conditions required, I'm convinced the economy's performance and current outlook would have been considerably worse."

With regard to his outlook, Lockhart said he expects the economy will remain weak at least through the first half of 2009. But with the benefit of policy action he added, "At some point—perhaps later this year—I believe financial markets will have stabilized sufficiently to support a recovery."

A transcript of Lockhart's remarks is available.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.

Contact: Marc Fordham 404-498-7324