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Banking

Atlanta Fed CEO: Economy "Noticeably Better" in 2012

photo of Atlanta Fed CEO LockhartThe recent spate of positive economic news suggests that the recovery may be gaining traction, said Atlanta Fed President Dennis Lockhart during a Valentine's Day speech in Sarasota, Florida.

Improvements in employment, household income, and credit expansion, among other factors, have bolstered Lockhart's view that "economic growth in 2012 will be noticeably better than 2011." Indeed, his outlook calls for 2.5 percent to 3 percent growth this year, barring shocks. This caveat is an important one given the role that shocks played in 2011, when higher commodity prices, supply chain disruptions, and other unexpected developments contributed to a markedly slower pace of growth than many economists had forecasted.

Policy statement reflects reality
Recent improvements in the economy may seem out of step with the Federal Open Market Committee's (FOMC) January 24 announcement that economic conditions would "likely warrant exceptionally low levels of the fed funds rate at least through 2014." However, Lockhart voiced continued support for that assessment, noting the path to full capacity will likely be "slow and arduous" as the economy works through several adjustments. These adjustments include steep declines in home values over the past several years, which have also constrained funding for start-up businesses, and tighter lending standards and a shrinking government sector.

These adjustments will not happen overnight, he noted. Accordingly, the 2014 policy statement reflects "the reality of where the economy is and what lies ahead."

However, Lockhart emphasized that this should not be viewed as a commitment to keep rates low, but rather as a conditional statement that is "based on a best estimate of the path the economy is on." Thus, the time horizon could change if the economy performs contrary to the FOMC projections.

Communication a policy tool
In addition to publishing guidance on interest rates following its January meeting, the FOMC formally announced a longer-term inflation target of 2 percent. Both are key pieces of a broader communication strategy, which also serves as an important policy tool, Lockhart explained. The FOMC's adoption of a formal inflation target helps the public understand how the committee will react to developments in the economy. And by helping participants such as businesses and consumers predict future rates, the committee's enhanced communications "should help lenders and investors decide how to best allocate their resources."

Despite recent good news about the economy, Lockhart remains cautious. "We haven't seen enough sustained improvement to be sure it will last," he said. "I am prepared to be somewhat patient and watch how the situation develops."

February 29, 2012