Medicine

Hotel di Bandung - Federal Reserve Bank of Atlanta President Dennis Lockhart said low interest rates are still needed to nurture an economic recovery that remains vulnerable to setbacks.

Pesan Hotel “There is risk associated with starting a process of tightening too soon,” Lockhart said today in a speech in Pensacola, Florida. “The strong medicine of low rates should remain in place to facilitate adjustment processes that are by their nature gradual.”

Lockhart and his Fed colleagues are seeking to determine when and how fast to raise interest rates to prevent a rise in inflation as the economy pulls out of the worst recession since the 1930s. He said the recovery will be “lackluster” and that most price gauges indicate inflation is slowing.

The Atlanta Fed chief said the economy is susceptible to “shocks or setbacks,” and he listed risks that include housing and commercial real estate, the Greek fiscal crisis, strained state and local government budgets, and the low levels of consumer spending.

While the labor market is “gradually strengthening,” he said, “stronger growth is needed to bring down the unemployment rate,” which registered 9.7 percent for three months through March.

Responding to audience questions after the speech, he said that while the pace of recovery is “somewhat frustrating,” a double-dip recession is “not very likely.”

Inflation in Check

Inflation data indicates that “retail price growth remains in check,” Lockhart, who isn’t a voting member of the Federal Open Market Committee this year, said in his speech. The Commerce Department reported yesterday that consumer prices excluding food and energy rose 1.1 percent in March from a year earlier, the smallest 12-month gain since 2004.

“Large amounts of resource slack have given businesses little pricing power, and underlying wage and price trends have continued to ease,” he said.

He also said he’s “very confident” that the central bank “will be able to manage the normalization of its balance sheet with appropriate timing and pace.”

The Fed’s balance sheet has more than doubled to $2.31 trillion since early September, 2008, as it pumped money into the economy to battle the financial crisis and recession.

Sequence of Tools

Lockhart told reporters he doesn’t have “preconceived notions” about the sequence of tools that should be used when the Fed returns to normal monetary policy.

In addition raising interest rates, tools include paying interest on banks’ excess reserves, absorbing reserves with large-scale reverse repurchase agreements or a term deposit facility, and selling the assets on its balance sheet.

“I tend to favor the view that a cycle of actual asset sales may lag the use of other tools,” Lockhart said. Lockhart said a recent rise in Treasury yields “reflects the continuing recovery and stronger broad economy.” Ten-year yields have risen to 3.84 percent from 3.65 percent on Feb. 1, when the Fed discontinued many of its special liquidity facilities.

Lockhart in his speech said the housing market that was “ground zero” of the crisis “appears to have leveled out and is bumping along a low bottom.”

“Stabilization of the home sales market -- and the housing sector more broadly -- is essential for a sustained recovery,” Lockhart said.

Rising delinquencies and loan losses on commercial real estate “will be a drag on the economy but won’t torpedo the recovery,” he said.

Lockhart, 63, took office in March 2007. He is a former Georgetown University professor who spent much of his career with Citibank and Citicorp, now Citigroup Inc.

--Editors: Christopher Wellisz, James Tyson