Financial Update (Third Quarter 2009)

Atlanta Fed President Lockhart: U.S. Economy Entering Stabilizing Phase

photo of Atlanta Fed Chairman Dennis LockhartIn a July 20 speech, Federal Reserve Bank of Atlanta President Dennis Lockhart said he thinks the economy is nearing bottom and soon will begin a slow recovery.

"Current economic conditions are mixed at best, but the economy appears to be in stabilization mode," Lockhart told the Rotary Club of Nashville, Tenn.

Weak economy mitigates inflation risks
Lockhart said he views the risks of inflation and deflation as roughly equal. He acknowledged concerns that inflation risks have risen recently in some quarters but said he believes businesses have little power to raise prices in the weak economy.

He added that measures taken by the Federal Reserve have altered the relationship between the quantity of bank reserves and overall spending in the economy. Since last October, the Fed has been paying banks interest on their reserve deposits. "This shift means that banks are more likely to hold reserves with the Fed than in the past and less inclined to look for a way to invest or lend excess reserves," he said.

Transcript of speech
Press release

"Now banks earn on reserves where previously they didn't. So now there is less direct linkage between growth in the size of the Fed's balance sheet and inflationary pressures," Lockhart added. "In other words, the absolute size of the Fed's balance sheet isn't as scary as it was before."

Resumption of growth foreseen later this year
Also, Lockhart discussed fundamental adjustments to the economy that have shaped his outlook, which calls for real economic growth to resume in the second half of 2009, with a weak recovery during the medium term.

"For example, the healing of the banking system will take time. Working off excess housing inventory will take time," he said. "The reallocation of labor to productive and growing sectors of the economy will take time. It will take time to complete the deleveraging of American households and the restoration of consumer balance sheets."

July 30, 2009