Lockhart: 2014 Likely a Transitional Year for Fed, Economy

This should be a year of transition for the U.S. economy and for Federal Reserve policy, Atlanta Fed President and CEO Dennis Lockhart said during a recent speech.

Last year's momentum sustained in 2014, so far
Economic growth picked up sharply in the second half of 2013, and that momentum has carried over into early 2014, Lockhart noted in remarks to the Rotary Club of Birmingham. In the first half of 2013, real gross domestic product (GDP)—adjusted for inflation—expanded at an annualized rate of 1.8 percent, slower than the average during the recovery from the Great Recession. Real GDP growth climbed to 3.7 percent in the second half of the year, Lockhart said.

"Some of the strength in the second half resulted from a buildup of inventory (which, of course, can't go on indefinitely), but we also saw strength in consumer spending, business spending on equipment, and exports," he said. "The pickup in consumer activity and business investment hints at rising confidence about future prospects for the economy."

Forecasting remains an imprecise science
Lockhart cautioned that it is difficult to get a precise read on the state of the economy. Data on employment and other important indicators are rarely totally positive or negative. In fact, he pointed out, December's employment report showed fewer than expected new jobs, and GDP growth during the current quarter could be disappointing because of severe weather events and the inventory cycle.

"Still, I think the fundamentals have improved, and the economy is likely to continue to perform in a higher gear over the full-year 2014," Lockhart said. "So, I will argue that 2014 may also turn out to be a transitional year in terms of economic performance."

If the economy indeed stays on track, this year could also bring an end to the Federal Open Market Committee's large-scale asset purchases, the Atlanta Fed president stated. The Committee has reduced the pace of those purchases at each of its two most recent meetings. "Absent a marked adverse change in the outlook for the economy," Lockhart remarked, "I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year."

February 12, 2014