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The Atlanta Fed


Lockhart Describes Housing and Financial Market Transitions, Outlook for General Economy

For immediate release: Nov. 7, 2007

Lockhart Describes Housing and Financial Market Transitions, Outlook for General Economy

HUNTSVILLE, Ala. — Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, today discussed the transitions taking place in housing and financial markets and how those developments affect the U.S. economic outlook heading into 2008. Lockhart also described how recent financial market turbulence will ultimately help to usher in a restructured state of normality in markets, which will feature improved risk management practices, reduced leverage and greater transparency for market participants.

In his remarks to a joint meeting of the Huntsville and Greater Huntsville Rotary Clubs, Lockhart provided a recap of the housing downturn and its effects on the overall U.S. economy, which he described at present as being limited. He noted recent economic strength but also mentioned the greater degree of uncertainty attached to the economic outlook. "Much of this uncertainty relates to the potential depth, length and impact of the housing downturn and potential flow-back to Main Street from the turbulence we have seen on Wall Street," he said.

During transitional periods, Lockhart said he focuses on real-time anecdotal information about the economy provided by business contacts, including the Atlanta Fed's board of directors. He said recent feedback from these groups and "other contacts on the ground is somewhat more negative than the [economic] numbers suggest. For instance, anecdotally, we hear that attitudes toward future discretionary capital investment have grown more cautious since the onset of financial market turmoil." Lockhart attributed this negative sentiment about future capital expenditures to growing pessimism about economic growth rather than restrictive credit conditions for businesses.

Lockhart said that he supported the Federal Open Market Committee's decision last week to reduce the federal funds rate by 25 basis points. "In part, my position was based on the notion of insurance against downside risks to the general economy given the unusually high level of uncertainty."

Lockhart also discussed inflationary risks, saying he believes core inflation is likely to continue to moderate. But he added, "recent increases in energy and commodity prices, among other factors, could put renewed upward pressure on headline inflation—the inflation you and I encounter in the marketplace."

On the economic front, Lockhart said he believes the most likely story line is a moderate slowdown in economic activity over the coming quarters, with a return to growth near trend by late 2008 as the housing sector begins to recover. "Underpinning this story is the view that our modern market economy has a keen ability to self-correct as opportunistic capital moves into depressed markets," he said.

A transcript of Lockhart's remarks is available.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.