Lockhart Sees Economic Stabilization Under Way, Discusses Fed Tools for Managing Inflation Risks

For immediate release: July 20, 2009

NASHVILLE, Tenn.—Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, said he expects the economy is nearing bottom and soon will begin a very slow recovery. "Current economic conditions are mixed at best, but the economy appears to be in stabilization mode."

In his remarks to the Rotary Club of Nashville, Lockhart also addressed inflation. "At this juncture my assessment is that inflationary and deflationary risks are roughly balanced." Lockhart acknowledged concerns that inflation risks have risen recently in some quarters. But he said he believes businesses do not have much power to raise prices with the weak economy and said Fed tools have altered the relationship between the quantity of bank reserves and overall spending in the economy.

"Since last October, the Federal Reserve has been paying banks interest on their reserve deposits," he explained. "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. 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. In other words, the absolute size of the Fed's balance sheet isn't as scary as it was before.

"Don't get me wrong," he added. "I'm not saying that the current size of the balance sheet is necessarily the most appropriate. What I am saying is one should not assume at this point that extraordinary measures to shrink the balance sheet are required to contain inflationary pressures."

At the same time, Lockhart said the Fed must remain vigilant against the emergence of inflation expectations. "I want to assure you the Fed has several tools and is readying itself to act on the balance sheet when the time comes. And I am very confident of the FOMC's (Federal Open Market Committee) commitment to price stability."

Also, Lockhart discussed structural adjustments that have shaped his outlook for the resumption of real growth in the second half of 2009 with a weak recovery over the medium term. "For example, the healing of the banking system will take time. Working off excess housing inventory will take time. 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."

A transcript of Lockhart's remarks is available on the Atlanta Fed Web site, and a podcast of the speech is available.

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