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Fed's Lockhart: US Economic Recovery Is Under Way

By Michael S. Derby, Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- One of the first Federal Reserve officials to speak since last week's interest-rate policy meeting offered Tuesday a cautious view on the economic outlook, and said a recovery would require an eventual " normalization" of central bank interest-rate policy.

"An economic recovery is under way" and "the situation is much improved, but there are sobering aspects of the economic picture," Federal Reserve Bank of Atlanta President Dennis Lockhart said. "My baseline forecast is for a relatively subdued pace of growth beyond the current quarter and through the medium term," he said.

The official said economic policy should aim to bring a "durable recovery" and lower unemployment, while keeping inflation in check. "The process of achieving this objective will necessarily involve judicious removal of government supports and the normalization of monetary policy," Lockhart said.

Lockhart spoke following last week's gathering of the Federal Open Market Committee meeting, and he is currently a voting member of the interest-rate setting body. The FOMC kept interest rates steady and said it expected to maintain its current policy for an "extended period," although officials explained the conditions that could cause them to start tightening rate policy.

Most private sector forecasters do not expect to see the Fed lift rates from their current 0% to 0.25% range until the middle of next year, and perhaps even later than that. Fed policy makers see a weak recovery and are mindful that taking away stimulus too soon could kill off the recovery before it even begins, economists believe. At the same time, the Fed faces little in the way of the inflationary pressures that would require a tightening in policy.

Lockhart's comments came from the text of a speech to be delivered before the Urban Land Institute in Atlanta. In his remarks, Lockhart portrayed an economy in transition. He noted "the economy has been supported and stimulated by several government programs."

On the positive side for the economy is the return of positive output growth. Also, housing appears to be on the mend: "Home prices appear to have bottomed out and have begun to move up in some markets," and "house sales appear to be growing in many markets." Many financial markets have "stabilized," Lockhart said.

But, "both the data and anecdotal descriptions of ground-level reality are quite mixed," Lockhart said. Even with "marked improvements" in financial conditions and improved capital flows "the banking system has not fully recovered-—far from it."

The employment sector is of particular concern, especially in light of the unemployment rate having reached levels last seen 26 years ago. "At this juncture, it's hard to be encouraged about a fast rebound in job growth," the official said. "My current outlook for employment is one of very slow net job gains once the trend reverses, in all likelihood sometime next year," Lockhart said.

The central banker devoted part of his speech to the worrisome developments he's seeing in the commercial real-estate sector. While he's anxious about the sector's problems, Lockhart does not expect issues in this sector to exact the same sort of price the broader housing collapse had on the economy.

"While the (commercial real-estate) problem is serious for parts of the banking industry, I don't believe it poses a broad risk to the financial system, " Lockhart said. Commercial real-estate difficulties "could be a factor that suppresses the pace of recovery," but "as the recovery develops, the (commercial real-estate) problem will be a headwind, but not a show stopper, in my view," Lockhart said.

-By Michael S. Derby, Dow Jones Newswires, 212-416-2214; michael.derby@ dowjones.com

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