Lockhart on the Economy and Fed Independence

Dennis. P. Lockhart
Federal Reserve Bank of Atlanta
February 2, 2010

The current state of the economy
I think we're definitely in recovery. I think that the recovery began in the third quarter of last year. By recovery, I simply mean going from a contracting economy to a growing economy. I think the recovery will be measured in the second half of 2009 as somewhere between 3 and 3 1/2 percent, and I think when we see the final numbers for the fourth quarter we'll see some rather strong numbers, probably above 4 percent for the fourth quarter. So the second half of the year, which of course sort of sets the stage for 2010, on balance is pretty encouraging; we're seeing some growth. I would expect that growth to continue into 2010.

Now we have some problems, obvious to everyone. The unemployment level of 10 percent is a serious problem. If we look at the real estate sector, particularly residential real estate, it's sort of a mixed picture today. What you have is prices appear to be stabilizing in most markets across the country. That's obviously a good thing. If we had continuing price drop, we would perhaps have more recessionary pressures in the economy.

Forecast for 2010
I'm, on balance, optimistic about 2010, but I'm not overly optimistic. I think it could be a bumpy ride. I'm concerned about the commercial real estate sector and the drag that it could put on the economy and on the recovery. I think growth will be sustained in 2010 but will in all likelihood be at a fairly low and slow level of improvement. So the economy will improve, but it will not be a terribly strong recovery.

The commercial real estate sector is a risk to the economy, and how that plays out will be very important to how the 2010 story overall plays out. A lot of commercial real estate construction and property lending is concentrated in small and regional banks. Those small and regional banks are a major, or at least significant, lender to small business. In a recovery, we look to small businesses as a source of job growth, and credit flows to small businesses could constrain their ability to hire.

So right now I'd say we are in a transition from an economy that was substantially supported by government programs and government interventions to an economy that, before too long but not quite yet, ought to be able to stand on its own and be propelled by private demand, consumer demand, and business investment. But we're not quite there yet; we're sort of in a transition stage.

Congressional proposals for auditing the Fed
I'm concerned that there are certain legislative proposals, particularly proposals related to auditing the Fed, that can have the effect of politicizing the process of monetary policy formation. The Fed is already audited thoroughly by the GAO—the Government Accountability Office—and by external auditors. In 2009, for example, there were twenty-eight GAO audits, and I believe there are still six ongoing. The real issue here relates to monetary policy itself. In 1978, the Congress had the wisdom to exclude the conduct of monetary policy from GAO reviews. Most of us who have private-sector experience think of an audit as basically checking the numbers, making sure all the controls have been followed, making sure the books are balanced, and so forth. But in a government sense, an audit can be a full-blown policy review. And this is a method, if misused, to put pressure on the Federal Reserve to change its course of action in terms of interest rates or monetary policy in general. I think this is a serious issue. The politicization of monetary policy is a concern worldwide, and it is accepted international practice that central banks be independent of short-term political influence. And research has shown, and it's widely accepted, that central banks that are politically independent of short-term pressures perform better from the point of view of price stability.

This is not a remote political or arcane economic discussion; this is something that Main Street should be concerned about. If the world begins to question the commitment of monetary authorities in the United States to price stability over the long term, Main Street will feel it in the interest rates that people and businesses borrow at.

Importance of regional Federal Reserve Bank presence
The Federal Reserve System was designed decades ago, very purposely to have a check-and-balance system to avoid the concentration of power in New York and Washington and to give every region of the country an apolitical voice in the development of monetary policy. Here in the Southeast, the Federal Reserve Bank of Atlanta has an extremely aggressive outreach program to business leaders and other leaders in the Southeast every cycle of weeks between Federal Open Market Committee meetings. We have forty-four directors in the Southeast. We consult with those directors in our formal meetings, and those directors in turn make contact calls to a number of contacts in their respective communities to try to get a sense of what real economic conditions on the ground are and what is the effect of current economic policy.

All of that feedback comes back to us as we develop a view of what's really happening in the economy and what the policies should be going forward. We estimate that in any given six- or seven-week cycle we may get input from as many as a thousand people through that process.

We also reach out to try to provide information and explain current policy through speeches and other contacts with people in the six states that we cover in the Southeast. Last year, for example, I and my staff made over 400 speeches, and we estimate that the aggregate audiences amounted to 30,000 people. These are all attempts to try, in a very transparent way, to explain monetary policy—sometimes a rather arcane and inaccessible subject—explain that policy to the public and to also give our view as to the economic outlook and what's happening in the economy.

So it's a very energetic attempt to democratize the process of gathering economic intelligence and input to policy. And I believe very strongly that that interactive system should be preserved.