Lockhart Discusses Economic Situation, Outlook, and Recent Fed Actions

For immediate release: March 27, 2008

CHATTANOOGA, Tenn. – Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, today said the U.S. economy faces challenges on three fronts: weakening growth, unstable financial markets, and inflation. In his remarks to the Rotary Club of Chattanooga, Lockhart noted that recent Fed actions, including cuts in the federal funds rate and the implementation of expanded liquidity provisions, have been focused primarily on financial stability.

Lockhart said weakness in the housing market was at the center of slowing economic growth, and he noted how residential weakness has weighed on other areas such as the retail segment of the commercial real estate sector. "Problems with subprime mortgages have led to tighter credit conditions that have restricted mortgage financing, placing further downward pressure on housing activity," he said.

Lockhart said financial markets have not yet stabilized following problems that developed in subprime mortgage markets last year. He described financial instability as another challenge for the current U.S. economy. "Although financial instability originated in the residential mortgage-backed securities market it has spread to affect a variety of credit markets via market linkages or institutional interdependencies," he said.

A third risk the economy faces, Lockhart said, is inflation. "Both headline and core inflation measures have been elevated in recent months and above a level I would consider in the long run to be consistent with an objective of price stability," he said.

To address these issues, the Fed has two basic sets of tools: changes in the fed funds rate and liquidity provisions, Lockhart said. "Changes in the federal funds rate can influence but not dictate other interest rates in credit markets," he said. By contrast, "Fed liquidity actions can be likened to a surgeon's instruments—designed to get at precisely the problem at hand—and no more," he said. Liquidity actions can be viewed also as a complement to monetary policy, he added.

In his outlook, Lockhart said, "tax rebates should provide some stimulus in the second and early third quarters of this year." However, he said, "I expect it will take much of the rest of the year for house prices to bottom out and financial markets to restore the necessary preconditions of stability—that is, confidence in asset values and confidence in transaction counterparties." As a result, Lockhart said the recovery in growth he had expected in the second half of this year may be delayed. He also said that an important policy objective at this juncture is to ensure that the economic slowdown is short and shallow.

Lockhart closed his remarks by offering guiding fundamentals for policy. "Integral to the Fed's dual mandate of maximum sustainable economic growth and stable prices is the goal of financial stability. Orderly markets and the flow of credit to businesses and households are necessary for the sustained prosperity of all sectors of the economy—not just Wall Street. My view of recent Fed interventions is that they are an attempt to help preserve or restore normal market functioning."

A transcript of Lockhart's remarks is available on the Atlanta Fed Web site at www.frbatlanta.org, and a podcast of the speech will be available after delivery.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.

Contact: Jean Tate 404-498-8035