The Federal Reserve will continue its bond-buying program to keep interest rates near historic lows until the U.S. labor market returns to healthy levels, Federal Reserve Governor Dennis Lockhart said Thursday.
In a luncheon speech to the Chattanooga Rotary Club, the president of the Federal Reserve Bank of Atlanta spoke out against leaning too heavily on the national unemployment rate to determine when the Fed should put the brakes on its monetary easing policy. Lockhart said other measures such as the number of full-time workers and the size of the labor force must also be used to judge the pace of the recovery.
"I would not interpret discouraged workers dropping out of the labor force as a sign of improvement, even if the unemployment rate falls as a consequence," he said.
The unemployment rate fell in September to 7.8 percent, after peaking at 10 percent in October 2009, and the labor department today will release its October jobs report - the last before the presidential election.
The U.S. economy has grown at about a 2 percent rate since the recovery began 40 months ago - what Lockhart called an economy "stuck in slow-growth mode."
Lockhart, one of the 12 members of the Federal Open Market Committee that determines U.S. monetary policy, said the board needs to see "substantial improvement" in the labor market before discontinuing its third round of "quantitative easing," or QE3.
"What distinguishes the newest round of bond purchases from earlier ones is the open-ended nature of the commitment," he said.
But the term "substantial improvement" in the labor market is open to interpretation, Lockhart said, especially given the many different methods of slicing the job figures released by the U.S. Bureau of Labor Statistics.
A drop in the headline unemployment rate actually could mean that people have stopped looking for work. A rise in the unemployment rate could mean that job seekers are actively looking for a new employer.
There's also the matter of so-called "underemployment," measured as the growing number of part-time workers who would rather be in a full-time job.
Lockhart confirmed that he has heard "anecdotal" reports that some employers plan to shift more workers to part-time employment as a result of the Affordable Care Act - Obamacare - but has seen no actual statistics confirming the trend.
In the meantime, he's looking for two key things in determining whether what's derisively known as "QE-infinity" should be discontinued.
"First, I would look for lower unemployment rates that are driven by increased flows of job seekers into employment," he said. "Conversely, I'd like to see growing public confidence in the labor market as measured by increased movement of people from out-of-the-labor-force status into the labor force - that is, growing labor force participation."
For now, the policy interest rate will continue to remain at effectively zero, as the U.S. approaches a fiscal cliff of spending cuts and tax hikes.
The federal government's failure to act could throw a monkey wrench into the slow-paced recovery, he said, and even lead to an economic retraction in the first half of 2013.
"The estimates are pretty severe," he said.
However, he's treating that possibility as a risk rather than part of his forecast.
"I'm assuming that they're going to do something about this in this relatively short window," Lockhart said.
His outlook calls for continued slow economic growth at less than 3 percent until 2014 at the earliest, and that growth could be reversed if conditions worsen in Europe, the housing recovery stalls or Congress doesn't reverse scheduled cuts in spending and tax increases set to become effective in January.
"The fiscal cliff concern is a headwind; weakness in housing has been viewed as a headwind," he said, also noting there is some concern of spillover from Europe's debt crisis. "If we could see the air clear over some of those issues, I think there would be the impetus for more economic activity, more investment and more hiring."