The stock market last week overreacted to hints that the Federal Reserve might soon back off its campaign to stimulate the economy, the president of the Atlanta Fed said Thursday.
Regional Fed chief Dennis Lockhart said no change in that policy will come until the Fed is convinced labor markets are much healthier.
Speaking to a lunch crowd of several hundred at the Marietta Kiwanis Club, Lockhart compared the Fed stimulus efforts to smoking and said Fed Chairman Ben Bernanke was talking about possibly using a “patch.”
“Some in the markets reacted as if he had said, ‘cold turkey,’” Lockhart said, referring to the recent sell-off sparked when Bernanke comments were perceived as signaling a “tapering” of the stimulus effort.
After the economy plunged into a deep recession in 2008, the Fed launched a two-pronged campaign to spur growth.
On one hand, the Fed has kept short-term interest rates near zero to make borrowing cheap. But the Fed also buys billions of dollars in assets – securities and treasury bonds, which can also boost the economy. Lockhart called that second policy “a supplement.”
The Fed will keep a lid on short-term rates “at least until the unemployment rate approaches a threshold of 6.5 percent,” he said.
Lockhart said the number is not an automatic trigger, since the rate can sometimes be misleading.
“We’d need to evaluate what the underlying story is,” he said.
He said he expects the national rate – currently 7.6 percent – to dip gradually, ending the year at 7.2 or 7.3 percent. The jobless rate in Georgia is 8.3 percent.