Fed Official: Real Estate Weakness Puts Economic Expansion at Risk


11 May  2011

Federal Reserve Bank of Atlanta President Dennis Lockhart said the pickup in jobs this year will reduce unemployment slowly and higher inflation in recent months probably won’t persist.

Data from last month show “an encouraging increase in payrolls,” Lockhart said today in Atlanta. “Employment growth of the magnitude we have seen so far this year is encouraging but will still only slowly bring down unemployment.”

Fed Chairman Ben S. Bernanke and the Federal Open Market Committee last month stood by their commitment to complete a $600 billion Treasury-securities purchase program aimed at boosting the recovery. They also released lower forecasts for economic growth this year and raised estimates for a key gauge of inflation that excludes volatile food and energy prices.

“The inflationary impact of some supply shocks is likely to be temporary,” Lockhart said in a speech to the Council for Quality Growth, a group that promotes economic development. “In fact, prices of several commodities have either leveled off or declined recently.”

The Labor Department said last week the economy added 244,000 jobs in April, with non-government employers adding 268,000 jobs, the best month for the private sector of the economy since 2006. Other job market data remain weak, as the unemployment rate has been stuck near 9 percent or higher for 25 months.

Begin Reversal

Lockhart said to reporters after his speech that while he wasn’t sure when the Fed would begin a reversal of its extraordinary stimulus, he didn’t expect a new program of Treasury purchases known as quantitative easing, or QE, would be needed after June.

“There’s a very high bar in my opinion” for a new program, he said.

“A high bar doesn’t mean totally impossible,” he said. “The way the economy is evolving simply suggests to me that further stimulus of any large magnitude, along the lines of what you would imagine a QE3 program would be like, is simply not going to be necessary.”

Any change of policy, signaled by a change in the Fed’s commitment to an “extended period” of low rates, would require a sustained pickup in employment, Lockhart said. “We would be looking at employment numbers that show several months of improving job creation, to suggest the job creation process is firmly established.”

Inhibit Spending

The Atlanta Fed leader said Congress and the Obama administration need to reduce the federal deficit and debt to prevent concern over fiscal policy from inhibiting spending by consumers and businesses. He said he wasn’t sure when long-term Treasury yields may rise out of concern for U.S. debt levels.

“I can’t predict when an attack of the bond market vigilantes would occur,” Lockhart said in reply to an audience question, referring to a risk bond investors will suddenly sell U.S. government securities. “We should not assume we have an indefinite period of time.”

The economy will probably expand at an annual rate this year and the next couple of years in the range of 3 percent to 4 percent, which is a “relatively modest rate of growth” following the longest recession since the 1930s, Lockhart said.

Weakness in the housing and commercial real estate industry has been a drag on the U.S. recovery and is a “key risk” to the expansion, he said.

“The residential real estate market remains depressed” and sales have not shown “any clear trend of improvement,” he said.

Lockhart, 64, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy with Lockhart next voting in 2012.