Banking

The U.S. economy has improved in 2011, but the "support of an accommodative Fed policy is still required," said Atlanta Fed president and CEO Dennis Lockhart in remarks January 31 at Miami Dade College.

One hopeful sign is the recent gains in consumer and business confidence, said Lockhart. Indeed, input from the Atlanta Fed's business contacts throughout the Southeast has taken on a more optimistic tone in recent weeks. "As businesses become more assured that growth will continue and their revenues will grow, they will increase investment in hiring," he said.

Employment, housing pose risks to outlook
However, despite the modest improvements on some economic indicators, others are still lagging—employment, for example. The national unemployment rate, at 9.4 percent, "is nowhere near acceptable levels," said Lockhart. Several factors are restraining job growth, he noted. Among them are the moderate pace of economic growth, slower business formation, and productivity gains that have allowed companies to get by with fewer workers.

Other risks to the improving outlook include sovereign debt problems in Europe that could worsen and negatively affect the U.S. economy, continued weakness in the housing market, and budget constraints facing state and local governments. "The weakness of the U.S. housing sector—particularly house prices—could reemerge as a major drag on consumer spending over and above the direct effect of slow construction activity," he said.

Deflation fears subside, inflation concerns rise
The rate of inflation is still below the level Fed policymakers consider to be optimal for economic growth, but deflation fears have abated somewhat, Lockhart said. Still, concerns over inflation crept up recently due to higher gasoline and commodity prices, which are generally more volatile than other prices. "Higher input costs have not, however, translated to broad inflation of consumer goods and service," he said. "Importantly, longer-term inflation expectations have stabilized in a healthy range."

While there are hopeful signs for the recovery this year, it is "a bit too early to declare victory," said Lockhart. Instead, "the appropriate outlook at this juncture is one of cautious optimism."

February 25, 2011