Banking

Despite some disappointing economic reports, the national economy continues to recover, said Federal Reserve Bank of Atlanta President Dennis Lockhart during June speeches in Florida and Georgia.

"Coming off a reasonably strong fourth quarter in 2011, the indicators of economic strength so far in 2012 have been underwhelming," he said. U.S. gross domestic product grew just 1.9 percent in the first quarter, and the most recent employment report showed weak job growth in May and included downward revisions to the figures for March and April. "As the disappointing numbers illustrate, the economy is working against some strong headwinds," Lockhart noted.

Headwinds persist
Those headwinds include efforts by households and the financial sector to shed debt as well as continued weakness in the housing sector. The Atlanta Fed chief also pointed to the so-called "uncertainty drag," which he believes is holding back hiring and capital investments by U.S. businesses.

Despite those challenges, Lockhart expects the economy to continue growing moderately, albeit with "a slow and possibly halting decline of unemployment." Meanwhile, inflation is expected to stay close to the 2 percent target set by the Federal Open Market Committee (FOMC), he noted. A number of key potential risks could derail that outlook, however. "It is my sense that material risks to the economic outlook are gathering," he said. Four risks in particular are on his radar:

• a further decline in home prices
• the effects of sharp federal fiscal adjustments
• the recession and financial instability in Europe
• a slowdown in large emerging economies, particularly Brazil, China, and India

Europe looms large
Lockhart said he is giving more weight to concerns about the European situation than he did just a few months ago, noting that a severe recession there would affect the U.S. economy through trade channels. Of greater concern is the risk that financial stresses in Europe could cause global debt markets to freeze up, he noted. Although U.S. financial institutions have taken steps to limit their direct exposure to European sovereign debt, "the financial system is too integrated, too liquid to expect that problems could be isolated to Europe," he said.

The FOMC's current monetary policy stance—which remains highly accommodative—is "appropriate" given his outlook for the economy, said Lockhart. However, the committee stands ready to act, if needed. "Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered," he said.

June 21, 2012