Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, rebutted criticism that that the central bank’s policies are monetizing national debt or encouraging deficit spending.
Federal officials under the leadership of Chairman Ben Bernanke have said that they would not try to monetize debt by increasing the money supply and stimulating inflation. Instead, Bernanke has encouraged President Obama and Congress to enact a sustainable fiscal policy.
Lockhart emphasizes that increases in the government’s debt and the accomodative monetary policy does not mean that they are connected and stresses the importance of fiscal reform. For the fiscal year that is supposed to begin October 1st, the forecasted deficit is $744 billion, which is 4 percent of the economy. The estimated shortfall is $973 billion, which is 6 percent of the economy.
Lockhart also stated that the Fed is not keeping interest rates low in an effort to encourage deficit spending and reduce the government’s financing costs. Instead, he states that the Fed is trying to keep interest rates low until the economy improves…
One critic said that the Fed’s current policy was “a cockeyed policy,” and that the policy was simply causing inflation instead of having any actual effect on the economy. Lockhart notes that the Fed has a number of tools to counter the risk of rising inflation, such as the central bank’s ability to pay interest on excess bank reserves.
Furthermore, minutes from the March Federal Open Market Committee meeting that were released recently show Fed officials say that the central bank ought to taper its bond buying program this year and taper off.
Last month, Bernanke said that the central bank would alter its monthly buying in response to the job market, emphasizing a need to be flexible. Bernanke also said that further gains were necessary, so these measures would not merely be a temporary improvement.