By Denny Gulino

WASHINGTON (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Thursday morning warned the Fed may find it necessary to
tighten policy before unemployment is “substantially” improved but that
time is not yet here.

“I continue to support the current stance of interest rate policy,”
he told a technical college audience in Atlanta. “But the time is
approaching when it will be appropriate to consider recalibrating
interest rate policy.”

Lockhart, who won’t again be an FOMC voter until 2012, said he
thinks the economy is moving toward “solid and broad-based final demand”
and that “the mix of sources of strength underpinning the recovery will
evolve. Former contributors to growth will beget new contributors.”

The persistent high unemployment rate, he said, is “not abnormal”
after a recession, nor is the high rate of productivity growth as
employers squeeze more work out of existing workers and remain reluctant
to hire.

“Total jobs lost in the recession and immediate aftermath approach
8 million,” he said. “This gap is likely to close only gradually.”

The spike in hiring expected to be in Friday’s jobs report will be
composed mostly of Census 2010 hires. As MNI reported Thursday, the
Census Bureau said about 417,000 more workers were on the payroll during
the May BLS survey week than in April, and that there is no double
counting inflating that number.

The private portion of the May payrolls gain will be 55,000,
according to Thursday’s monthly estimate the ADP paycheck processor. The
overall payrolls gain will be 540,000, according to the median
expectation in a Market News International survey.

Lockhart said he suspects the “outsized” productivity gains won’t
continue at the same pace as employers gradually increase hiring, since
most of the increased efficiency is not of the more durable variety,
from applied technological innovation. “Squeezing more and more out of a
diminished and, in many case, reorganized workforce may not be
sustainable, he said.

Indeed, the first quarter productivity measure reported by the
Labor Department Thursday morning was downwardly revised, going to a
2.8% rate of growth, compared to the preliminary reading of 3.6%.

New claims for unemployment benefits remained on their track of
tiny incremental improvement, with the May 29 week showed a seasonally
adjusted decline of 10,000, to a level close to expectation, of 453,000.

In any case, the Fed won’t be waiting for the big improvement in
unemployment and any slackening of productivity, he said. “As the
economy continues to improve and financial markets find firmer ground,”
Lockhart said, “extraordinarily low policy rates will not be needed to
promote recovery and will become inconsistent with maintaining price

Lockhart said as important as is the Fed’s mandate to pursue
maximum employment as well as low inflation, “I accept that good policy,
even in circumstances of unacceptable levels of unemployment, may
incorporate higher interest rates” to preserve low inflation.

Meanwhile, “The conditions that require a change of policy are not
yet at hand,” he said, and, “Overall, for now, the inflation picture is
not a major concern.”

He suggested that the current low inflation is also not
sustainable. “The rate of consumer price inflation has slowed quite a
lot: because of the recession and the “relatively modest recovery so
far.” In addition, longer-term inflation expectations have not yet been
altered by “recent disinflation.”

Business investment in equipment and software, Lockhart said, is
surprisingly strong. Overall, although “risks remain to a forecast of
sustained growth, I think confidence is warranted,” Lockhart said.

** Market News International Washington Bureau: 202-371-2121 **

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