Fed's Lockhart says QE3 may not be needed

The U.S. economy may not need further help from the Federal Reserve when its $600 billion stimulus plan runs out in June, but that decision will hinge on the path of the economy, a top Fed official said on Wednesday.

Atlanta Fed President Dennis Lockhart sounded skeptical about recent improvements in the economy, saying housing still posed a significant downside risk to growth and urging policymakers to stamp out even the smallest risk of deflation.

But asked about whether the Fed would have to extend its bond purchases or quantitative easing into a third round, a prospect referred to on Wall Street as QE3, Lockhart told reporters it might not have to.

It depends entirely on the state of the economy and if I take my base case forecast which continues the moderate rate of growth through 2011 and for 2012, I'm not sure it will be necessary, Lockhart told reporters after a speech to a group of professional accountants.

Still, his comments showed little inclination on cutting the bond purchase program short.

Lockhart said the Fed must do everything it can to make sure the economy skirts a deflationary cycle of falling prices, lower wages and deteriorating confidence, which he said is much harder for central banks to deal with than inflation.

Lockhart said he would like to see more consistent progress in the unemployment rate before the Fed begins to think about removing some of the unprecedented monetary support it has offered to an ailing U.S. economy.

If I felt that the reduction of unemployment was firmly established and on the right track ... then I would be more comfortable at that time to begin to remove accommodation, Lockhart said.

Echoing remarks by Fed Chairman Ben Bernanke earlier in the day, Lockhart said the central bank would not step in to help the municipal bond market, which some analysts fear could face some significant defaults this year.

We are going to stick with Treasuries, he said.

He reiterated that weak economic conditions continue to warrant keeping official borrowing costs at very low levels for an extended period.

(Editing by Carol Bishopric)