Banking

The most important real economic effects of the stock market's recent swings could be on consumer spending, Federal Reserve Bank of Atlanta President Dennis Lockhart said during an August 15 speech in Florence, Alabama.

"Volatility alone could have a negative impact on consumer psychology at a time of already weakening spending," Lockhart said. "Furthermore, if the loss of stock market value persists, the effect from the loss of investment value could combine with the loss of value in home prices to discourage consumers more and longer."

The causes and effects
Speaking to Rotary clubs from the Florence-Muscle Shoals area in northwest Alabama, Lockhart framed his remarks as answers to topical questions about the economy and financial markets. In addition to the question concerning the impact of the market gyrations, he also addressed their causes.

Lockhart said the reasons for the volatility include the increasing recognition of an economic slowdown in the United States and Europe, a reaction to the downgrade of the United States' credit rating, and concerns about government debt in European countries.

Looking down the road
As for the economic outlook, Lockhart said that amid "a fog of uncertainty that is thicker than normal," the Atlanta Fed has lowered its near-term and intermediate forecast for national economic growth. Still, he expects the economy will continue to grow modestly. "In other words," he remarked, "we do not expect the onset of outright contraction—a recession—but I have to say the risk of recession is higher than we perceived a month or two ago."

Lockhart said he is cautious about the need for further monetary action. He believes the economy will resume a healthier pace of growth. But if that assessment proves wrong, Lockhart said the Federal Open Market Committee has the tools available to address whatever circumstances arise.

"At this juncture, we should not jump to conclusions," Lockhart said. "A clearer picture of economic reality will be revealed in time as immediate uncertainties dissipate. It's premature, in my view, to declare these important questions relating to our economic future settled."

August 30, 2011