Financial Update (Fourth Quarter 2007)

Turbulence Will Give Way to Improved Markets, Atlanta Fed President Says

LockhartAtlanta Fed President and Chief Executive Officer Dennis P. Lockhart believes the most likely course for the nation's economy is a moderate slowdown over the coming quarters, with an upturn by late 2008 as the housing market begins to recover.

"Underpinning this story is the view that our modern market economy has a keen ability to self-correct as opportunistic capital moves into depressed markets," Lockhart told a joint meeting of the Huntsville and Greater Huntsville Rotary Clubs in a Nov. 7 speech in Huntsville, Ala.

Current turmoil will lead to normalcy, less opacity
During the talk, Lockhart discussed transitions in housing and financial markets and how those developments affect the nation's economic outlook approaching 2008. He also explained how recent financial market turbulence eventually will help introduce a restructured normalcy in markets, which will feature improved risk management practices, reduced leverage, and greater transparency for market participants.

Transcript of speech
Dennis Lockhart bio

In discussing the current economy, Lockhart said the most recent data add up to a mixed picture of the economy but basically show continued strength. For example, the initial report of gross domestic product growth issued at the end of October showed the economy expanding at an annual rate of almost 4 percent, a small increase from a strong second quarter. "This year's solid growth has taken place despite widespread and well-publicized weakness in the housing sector," Lockhart said.

Grassroots reports remain important
Amid transitional periods like the current one, Lockhart said he pays particular attention to anecdotal economic information he gets from businesspeople, including the Atlanta Fed's board of directors. He said that recent feedback "is somewhat more negative than the [economic] numbers suggest. For instance, anecdotally, we hear that attitudes toward future discretionary capital investment have grown more cautious since the onset of financial market turmoil."

Lockhart attributed this negative sentiment about capital expenditures to growing pessimism about economic growth rather than tight credit conditions for businesses. On the other hand, he said greater uncertainty exists in the economic outlook related to the potential severity of the housing downturn and the possible affect that Wall Street turmoil will have on Main Street.

November 20, 2007