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Open-ended bond buys not "infinite": Fed's Lockhart

CEO of the Federal Reserve Bank in Atlanta Dennis Lockhart listens during a presentation at the American Economic Association Conference in
CEO of the Federal Reserve Bank in Atlanta Dennis Lockhart listens during a presentation at the American Economic Association Conference in

By Pedro Nicolaci da Costa

ATLANTA (Reuters) - The Federal Reserve's unconventional monetary stimulus has its limits, and could pose threats to market functioning and financial stability if pushed too far, Atlanta Fed Bank President Dennis Lockhart said on Monday.

In another sign of growing reticence about the Fed's bond-buying quantitative easing program within the central bank, Lockhart, seen as a policy centrist who tends to fall in line with Chairman Ben Bernanke, said the open-ended approach to bond buys does not mean there are no constraints on the policy.

"‘Open ended' does not mean ‘without bound.' The program is not ‘QE Infinity,'" he said in a speech to the Rotary Club of Atlanta.

Lockhart emphasized a weak U.S. job market is still a major concern for Fed policymakers, and urged fiscal authorities to come to some kind of resolution on budget matters, which might help lift some of the uncertainty hurting business investment.

"Unemployment, underemployment, and abandonment of efforts to find a job, taken together, present a sobering picture for policymakers," Lockhart said.

The unemployment rate was 7.8 percent in December and was expected to come down all too gradually in 2013. At the same time, inflation looks set to remain below the Fed's 2 percent target for the foreseeable future.

Despite that outlook, minutes from the Federal Open Market Committee's December meeting showed several policymakers thought the central bank might have to halt or curtail the current $85 billion monthly securities purchases. Lockhart's speech suggested the sentiment is relatively widespread.

"The accumulating purchases of bonds could complicate the FOMC's efforts to withdraw monetary stimulus when the appropriate time comes. We have tested tools for exit, but it will be uncharted territory," Lockhart said.

Still, Lockhart said he saw no imminent risks to the stability of the global financial system.

"I don't see any really immediate threats to financial stability," Lockhart told reporters after a speech.

He forecast the U.S. economy would expand between 2 percent and 2.5 percent this year.

"The Fed has done a great deal to date to promote recovery, but the ongoing effectiveness of Fed efforts does depend critically on the removal of fiscal policy uncertainty," he said.

Among reasons for optimism, Lockhart cited recent signs of strength in housing, a recent boom in auto sales and a rise in U.S. energy exploration and production.

In response to the financial crisis and deep recession of 2007-2009, the Fed cut official interest rates to effectively zero and bought over $2 trillion in securities to keep long-term rates down.

Some economists worry the bloated $2.9 trillion balance sheet could lay the groundwork for future inflation. Others, however, note the rate of U.S. economic expansion remains too far beneath its potential for persistent price pressures to take hold.

(Reporting By Pedro Nicolaci da Costa; Editing by Andrea Ricci)

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