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With recovery "largely done," Lockhart says Fed should step aside

(Adds quotes, comments on fiscal policy)

ATLANTA (BSE: ATLANTA.BO - news) , Jan 9 (Reuters) - Recovery from the economic crisis is "largely done," and officials should now turn to addressing longer-term issues like how to boost productivity, Atlanta Federal Reserve bank president Dennis Lockhart said on Monday.

Lockhart said he felt the economy was entering a "transitional" phase, largely healed from the crisis but in need of fresh policies that could encourage investment, improve productivity, and counter the demographic drag of an aging population.

It will fall to the incoming administration of Donald Trump and the Republican Congress to take up the issue, following years in which the central bank has been the main player in steadying the economy, Lockhart said in one of his last speeches before his retirement at the end of February.

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"How is our economy positioned for the future? This is the key question. The economy today is well positioned for moderate growth and steadily improving conditions," Lockhart said. "It's less certain that the economy is positioned for a breakout to markedly higher growth on a sustained basis."

The types of regulatory, tax or other changes that may be needed, he said, are "more the domain of Congress, the administration, and the private sector..It's time for the Fed and monetary policy to shift to more of a support role."

Any fiscal plans made by the new government should be carefully targeted to boost productivity, not just to pump stimulus into an economy near full employment.

"Fiscal stimulus when...the economy is in recession is one thing. Fiscal stimulus at a time of full employment is another thing," Lockhart said. "It simply suggests that the fiscal side will have to be very discerning."

Lockhart joins a growing list of Fed officials who have begun subtly suggesting that it is not the time for a massive new spending program, and that any push to invest in infrastructure be targeted and carefully designed.

The economy is near full employment, inflation is close to the Fed's two percent goal, and the United States appears locked in for steady growth of around 2 percent annually, said Lockhart, who is due to retire next month.

One risk is that inflation takes off and forces the Fed into a faster pace of rate increases, perhaps triggering a recession. Some Fed officials are already making the case for faster increases, but Lockhart said he still felt the Fed may only need to raise rates twice this year.

"The job of cyclical recovery is largely done. The Federal Reserve is quite close to achieving its mandated policy objectives of full employment and stable prices," Lockhart said in an economic policy address at the Rotary Club of Atlanta.

At its most recent meeting in December, the Fed raised rates and indicated the tempo of increases may accelerate following the election of Trump on promises of a major spending push and tax reform.

Lockhart said he felt it was too early to make any judgment about how the new administration may change the path of the economy, though a possible fiscal expansion has made it more likely the economy will grow faster than expected. (Reporting by Howard Schneider; Editing by Andrea Ricci and Chizu Nomiyama)