Fed cannot rule out more bond buys says Lockhart

The Federal Reserve cannot rule out expanding its $600 billion stimulus as political upheaval in the Middle East and North Africa heighten U.S. economic uncertainty, a top Fed official said on Monday.

My first inclination is to be very cautious about extending asset purchases after June, Atlanta Federal Reserve Bank President Dennis Lockhart told a conference sponsored by the National Association for Business Economics.

Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options, he said.

This includes a need for policy-makers to remain vigilant against the prospect that recent spikes in commodity and energy prices, which are making businesses and consumers nervous, do not give rise to an inflationary psychology, Lockhart said.

A soft labor market and meek wage growth makes such a development unlikely, he said. Indeed, a recent pick-up in core inflation was viewed as welcome news for policy-makers, who just a few months ago had been worried about the potential for deflation.

Lockhart said recent data showing falling unemployment and stronger job creation were encouraging. But he added that there was still plenty of room to heal for the ailing labor market, which was battered by the worst recession in generations.

It is premature to declare a jobs recovery firmly established, Lockhart said.

Revolutions beginning in Tunisia and Egypt have spread to other countries in the region, including Libya and Bahrain. This has pushed the price of oil above $100 a barrel, complicating the Fed's objective of stimulating economic growth while keeping prices under control.

While consumers tend to see higher prices at the pump mainly as an inflationary force, policymakers might look at it as a drag on economic growth.

Lockhart said some of his business contacts now thought they might be able to begin passing on cost increases at the wholesale level on to consumers over the next year.

One can't help but notice rising inflation anxiety among the business community as well as consumers based on the experience with highly visible and highly publicized commodity prices, he said.

So far, this anxiety has not translated to a loosening of the moorings of inflation expectations. We policymakers must watch indications of expectations very carefully and be on guard.