Federal Reserve: We Will Continue to Subsidize If the Economy Worsens

If the U.S. economic growth continues to slow, Federal Reserve Bank of Atlanta President Dennis Lockhart says the bank could purchase more Treasuries (NYSE:TLT) or alter its balance sheet. “If additional actions are required, I can assure you the Federal Reserve is not out of bullets,” said Lockhart Monday. “Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view.”

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Last week, Ben Bernanke announced that the Federal Reserve would be keeping borrowing costs low, with the benchmark rate between zero and 0.25% through mid-2013. The Federal Open Market Committee lowered its economic assessment, leaving open the possibility that more action would be taken to stimulate the economy. The committee said they discussed “the range of policy tools available to promote a stronger economic recovery.”

While Lockhart remains cautious about further monetary action, and expects growth will likely resume, making further action unnecessary, he does acknowledge that, “if that assessment proves to be wrong, I believe we do have the tools to address whatever circumstances arise.”

The risk of a recession has risen to 30% this month according to a survey of 39 economists, up from 14% in July. Growth is expected to average a 2.3% annual rate in the second half of the year, down about a percentage point from last month’s estimates. When adjusting for inflation, GDP only grew 1.6% in the second quarter from the year earlier. According to a study by Jeremy Nalewaik, a Fed board economist, historically about 70% of the time GDP growth has fallen below 2% annually, a slump has followed within a year.

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