Fed's Lockhart Says U.S. Economic Recovery Not Yet Sustainable

Bloomberg:

Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic recovery isn’t sustainable enough yet to warrant raising interest rates or shrinking the central bank’s near-record balance sheet.

There’s a “small risk of deflation,” and the rebound from the worst recession since the 1930s faces risks from Europe’s debt crisis, drops in state and local spending, commercial real estate losses and the Gulf of Mexico oil spill, Lockhart said in the text of a speech today in Baton Rouge, Louisiana.

Fed policy makers last week signaled Europe’s growth crisis may harm American growth, saying “financial conditions have become less supportive,” and repeated a pledge to keep interest rates near zero “for an extended period.” The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than the 3 percent estimate issued last month, according to Commerce Department data released June 25.

“Recent developments make me even more convinced that current policy is appropriate,” Lockhart said in prepared remarks to the Rotary Club of Baton Rouge. “Financial markets and many businesses are more nervous today than a few weeks and months ago, and it’s my view that monetary policymakers should hold to a guarded policy stance and evaluate carefully the risk and reward of a change of policy.”

The remarks are some of the most downbeat on the U.S. economy from a Fed official in recent months. Lockhart doesn’t vote on Federal Open Market Committee decisions this year. Kansas City Fed President Thomas Hoenig has called for an increase in the Fed’s benchmark rate within months and has dissented from four FOMC decisions this year.

Record Low Rate

The Fed has left the overnight interbank lending rate target at a record low of zero to 0.25 percent since December 2008.

“The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth,” said Lockhart, 63, a former banker who became the Atlanta Fed’s chief in 2007. “I make this point not to predict a reversal of the progress made but just as a cautionary reminder to avoid counting chickens too early.”

Central bankers are concerned that persistent unemployment may reduce the pace of recovery. The Labor Department will report on July 2 that unemployment rose to 9.8 percent in June from 9.7 percent in May, according to the median forecast of economists in a Bloomberg News survey.

8 Million Jobs

The U.S. lost more than 8 million jobs since the start of the recession in December 2007, the most of any slowdown in the post-World War II era.

While U.S. financial firms have “rather small and manageable direct exposure to the Greek government” and other European sovereign borrowers, there’s still a risk that financial market pressures may be transmitted to the U.S. economy and that a stronger dollar may weaken demand for exports, Lockhart said.

For U.S. state and local governments, budget gaps are likely to widen in 2010 and 2011, with one unspecified estimate of the combined deficit for all states this year at $144 billion, Lockhart said. “This situation is our nation’s very immediate analog of the public finance pressures being felt in Europe,” he said.

Posted via email from Jim Nichols