Fed's Lockhart: U.S. Can't Grow Out Of Debt Problems

Posted on Monday, February 14, 2011

The Federal Reserve's monetary stimulus plan can play a role in bringing down unemployment, even if the country's jobless rate is unlikely to fall below pre-crisis levels, a top Fed official said.
The Fed in November announced a controversial plan to purchase an additional $600 billion in bonds to keep down long-term borrowing costs and stimulate the recovery.
Critics of the program have argued much U.S. unemployment may be due to "structural" factors such as skill mismatches, so monetary policy might be powerless to address the problem.
However, Atlanta Federal Reserve Bank President Lockhart pushed back against that notion.
"There is scope for reducing the unemployment through sensible monetary policy but that will leave probably a higher level of 'natural' unemployment ... than maybe we enjoyed before the recession," he said during a panel hosted by the Consulate General of Switzerland in Atlanta.
The U.S. jobless rate fell to 9 percent in January from 9.8 percent in November, the biggest two-month decline in more than 50 years. However, hiring remains anemic, Labor Department data show, with only 36,000 jobs added last month.
Asked about the problem of debt, the focus of the meeting, Lockhart said the United States needs a credible long-term plan to address bloated budget deficits expected to reach a record $1.48 trillion this year.
He said the country cannot expect to simply grow its way out of the problem, arguing the current rate of economic expansion of around 2.5 percent to 3 percent is not nearly fast enough to catch up with the debt.
"Although we are in recovery at the moment and we are seeing growth, the economy is expanding, until we have dealt with the underlying fiscal issues we are not growing on absolutely sound foundations," Lockhart said.
Lockhart did cite some encouraging signs for small businesses, saying he was seeing fresh evidence that banks' reluctance to lend was abating.
"What we get in our surveys of lending officers in recent months is some indication of the relaxation of lending terms," Lockhart said.

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