–Must Contain Infln Expectations If Rates To Stay Approp For Recov
–Accommodative Pol Appropriate For Tentative, Fragile Recovery
–Greece Situation Deserves ‘Rapt’ Attention
–Greek, Euro Fear Could Spark Dlr Safe Haven Flow; Currency Appreciates
By Brai Odion-Esene
WASHINGTON (MNI) – Atlanta Federal Reserve President Dennis
Lockhart warned Monday that although he is not concerned about inflation
in the immediate future, concerns over the rising U.S. deficit — and
belief the country will inflate out of the problem — could increase
inflation expectations and present a dilemma for monetary policy.
“If such a situation begins to develop, the Fed will face a
difficult trade-off between continued support for the recovery and
aggressive action to re-anchor inflation expectations,” Lockhart in
prepared remarks to the Naples World Council on World Affairs in
He noted that current monetary policy as it stands is “obviously
very accommodative, and, in my opinion, is appropriate for a recovery
that is tentative and facing headwinds.”
However, the Fed official said government finances are strained at
all levels, with the rising debt-to-GDP ratio a source of “great”
concern. Not only do these fiscal pressures represent another downside
risk for the broad economy, he said, “but I see a connection to
inflation risk as well.”
Although the current accommodative stance of policy is not
inconsistent with the dual mandate as long as inflation expectations
remain well anchored, Lockhart cautioned that if the public becomes
convinced nothing will be done to restore the federal fiscal balance,
especially at the federal level, this skepticism may be reflected in
“In my view, the capacity to maintain interest rates at the level
appropriate to support the recovery depends critically on containment of
inflation expectations,” he said.
He said the “drama” in Greece should heighten recognition of the
urgent need in the U.S. for a credible path to fiscal sustainability.
For now, however, Lockhart said inflation expectations are holding
steady, and incoming data suggest price pressures are muted. “It is hard
for me to summon much concern about inflation in the immediate future,”
Lockhart in his remarks also provides his outlook for the economy
– domestically and globally — saying he agrees with forecasts that see
first quarter GDP coming in around 3%.
“Underlying continued growth is a steady improvement in private
spending in the United States. Consumer spending is expanding modestly,”
he said. Still, “The recovery under way seems at this juncture to be
tentative and fragile.”
Overall, Lockhart expects the U.S. to experience a “relatively
modest recovery, with slow reduction of unemployment.” He predicts
various headwinds to hold back GDP growth. These include:
“A weak banking sector that is slow to expand credit in part
because of weak loan demand and commercial real estate problems, subdued
consumer activity reflecting a more frugal consumer mindset as well as
restricted consumer credit, and extremely cautious business investment
in both inventory and capital goods.”
The outlook for the global economy also continues to see
improvement, the Atlanta Fed chief said, noting that “China’s economic
growth has been especially strong, lifting global demand for raw
materials and capital goods.”
Latin America has also weathered the crisis “much better” than
previous downturns he said, due to stronger economic fundamentals. But
Japan’s economic growth trajectory remains very uncertain, while the
recovery in Europe is fragile due to concerns over Greece and other
nations with large fiscal burdens.
Lockhart expanded on ways he believes Greece’s problems could
impact the U.S., for instance that fiscal problems could dampen euro
area growth and so constrain U.S. exports.
Second, he warns that safe haven currency flows from the euro into
dollar assets could cause appreciation of the dollar and hurt U.S.
Third is the possibility that the Greek fiscal crisis could lead to
a broad shock to financial markets — impacting the banking system or in
the form of a general retreat from sovereign debt, Lockhart said.
But at this point, “these possibilities are not factored into my
outlook in any way. But developments around the Greek situation deserve
rapt attention,” he concluded.
** Market News International Washington Bureau: 202-371-2121 **