- Dennis Lockhart, President, Federal Reserve Bank of Atlanta, spoke to the American Business Council of Dubai on Sunday.
Large Middle Eastern holders of U.S. Treasuries shouldn’t worry about the stability of their investments especially as the U.S. economy shows more signs of improvement following the worst recession in a generation, Atlanta Fed President Dennis Lockhart said on Sunday.
U.S. government debt has long been a key holding for sovereign wealth funds in the oil-rich Arab Gulf. These funds, the largest of which are in Saudi Arabia, the United Arab Emirates and Kuwait, are investment vehicles that store excess dollar-denominated energy revenues.
Mr. Lockhart, an alternate member of the U.S. Federal Reserve committee that sets interest rate policy, said that while energy-surplus countries were likely to diversify their holdings over time, U.S. government debt was still “a superb investment for liquidity” given its sovereign backing and easy tradability.
“It’s their choice what they buy with their surpluses, so I can’t speak for them, but I would hope they continue to view the U.S. Treasury market as at least one of their preferred markets,” he said. He emphasized that he was giving his personal opinion, not the official view of the Fed.
The dollar, he added, would likely lose some of its position as the world’s reserve currency, in part because people began to question its role when the financial crisis set in about six years ago.
At least for now, however, he said the dollar would remain central in the world’s currency markets.
“For the near-term, medium-term foreseeable future, I do not see a substitute for the dollar and I think the dollar will continue to be valued both as a reserve currency and a source of investment,” he said. “We have the deepest capital markets in the world for the dollar, which is very important to investors, and I think the fundamentals and the cyclical aspect of the U.S. economy is improving, which should give more encouragement to holders of dollars.”
That improvement was reflected in an April jobs report last week that said the economy added 288,000 jobs, a higher figure than expected. As more people went to work, the unemployment rate dropped to 6.3% from 6.7% the previous month, its lowest point since the beginning of the crisis.
But there have been discouraging signs, too. Economic growth was flat in the first quarter, while the unemployment rate went down in part because a lot of people gave up looking for work. The complex dynamics of the U.S. labor situation were one reason Fed chairwoman Janet Yellen decided last month to scrap a target of 6.5% unemployment below which the Fed would consider raising short-term interest rates.
Speaking at an American Business Council of Dubai event at the Dubai International Financial Centre, Mr. Lockhart said he expected the economy to be healthy enough by the latter part of 2015 for the Fed to begin raising interest rates from near zero, where the central bank has kept them to stimulate economic activity and job growth. He said he expected the Fed to end another key stimulus measure — a large monthly bond-buying program — by the end of this year.
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(via WSJ Vault)