(Adds more Lockhart comment)
By Alister Bull
ATLANTA, March 23 (Reuters) - A worsening economic outlook supported the decision by the U.S. Federal Reserve to undertake massive purchases of U.S. Treasuries, a top Fed policy-maker said on Monday, saying that aggressive action to tackle the crisis will pay off.
Atlanta Federal Reserve Bank President Dennis Lockhart told Reuters he has grown more pessimistic about the chances that an economic recovery would get under way this year.
Lockhart said purchases of longer-dated Treasuries had been discussed by the Fed in January but seemed premature, owing to the economic forecast and because official stimulus measures were pending.
Those factors, however, had changed when the Fed's policy-setting Federal Open Market Committee met last week and made the decision to buy longer-dated Treasuries.
"At this FOMC meeting, at least relative to my own forecast ... that forecast had deteriorated from January to some extent, and much of the total economic package had been clarified," Lockhart told Reuters in an interview.
"So I think it was appropriate and proportionate to support the proposal of a $300 billion program for Treasuries," he said. The Fed's surprise decision to make the purchases sparked a rally in U.S. government debt prices, and Lockhart said the results so far had been "encouraging".
Lockhart said the success of the Bank of England's recent gilt purchase program had been influential among policy-makers weighing the costs and benefits of buying Treasuries, which was the first time since the 1960s the Fed had taken such steps.
But the potential impact on the dollar, which has fallen sharply since the decision, had not been a factor that influenced his own analysis.
"It did not weigh heavily on my own thinking...I did not focus on the exchange market effects," said Lockhart, a voting member of the Fed's policy-setting committee this year.
There had also been a healthy debate among policy-makers at the March 17-18 meeting about purchasing Treasuries. Lockhart said he felt the expansion of Fed support for the mortgage market was a safer bet, because it was already underway, but others argued for buying Treasuries.
"In the end, as is obvious by the vote, a very strong consensus (emerged) that the mix of these two programs was appropriate to the circumstances, he said.
The vote to buy up to $300 billion of longer-term Treasuries, and provide a further $850 billion of support to the U.S. mortgage market, was unanimous.
Lockhart said he has not given up hope that an economic recovery would get under way in 2009, but could not ignore accumulating evidence to the contrary.
"My interpretation is there is a still a reasonable chance for the beginning of a recovery in the second half of the year, but at the same time, I am prepared to consider it as more likely to be an early 2010 development," he said.
Lockhart, a former banker, said he expected the recovery to be very gradual and did not forecast the economy to return to its so-called 'trend' rate of growth until around 2012, without disclosing what he thought the trend rate was at the moment.
The collapse of the U.S. housing market sparked a global credit crunch that has resulted in the country's worst economic downturn since the 1980s.
The Treasury earlier on Monday detailed plans to purge the banking system of toxic assets that have frozen the lending that is vital for spending and investment, exacerbating the downturn.
The Fed is part of the initiative to buy up toxic assets from banks, and Lockhart said he was confident the plan is big enough to make a difference.
"I am a very, very strong supporter of the program announced ... to remove legacy assets from bank balance sheets. I think that will be a real difference-maker," he said.
Some of the boldest policy responses to the financial crisis have been led by the Fed, which has cut interest rates almost to zero and flooded markets with dollars to head off a Japanese-style deflation, where price declines inflicted a decade of stagnation in the 1990s.
Lockhart said deflation was not a significant risk.
"The most recent monthly inflation numbers have actually been encouraging as regards deflation...it does not appear to be a realistic concern in the near-term," he said.
U.S. consumer prices rose 0.4 percent month-on-month in February. (Editing by Leslie Adler)