By Steven K. Beckner

(MNI) – Reflecting a generalized shift toward greater Federal
Reserve concern and caution, Atlanta Federal Reserve Bank President
Dennis Lockhart said Wednesday that a recent “downshift” in economic
growth and disinflationary forces have made him “even more convinced”
that the Fed’s accommodative monetary policy stance is “appropriate.”

Lockhart said the Fed needs to exercise “caution” and “patience” in
the face of what he called a “heightened sense of uncertainty and risk
surrounding the outlook.”

He said the lack of wage-price pressures enables the Fed to focus
primarily on promoting growth and jobs.

Lockhart said the European debt crisis and the Gulf oil spill,
along with other factors, have exerted a dampening effect on growth,
which he said had already decelerated after a burst of “pent-up demand”
carrying over from the recession.

In remarks prepared for delivery to the Rotary Club of Baton Rouge,
Louisiana, he also warned that what growth forces there are could prove
“transitory.”

Though not a voting member of the Fed’s policymaking Federal Open
Market Committee, Lockhart’s comments reflect those made both publicly
and privately since the FOMC met last Tuesday and Wednesday.

The FOMC concluded that meeting by reaffirming its zero to 25 basis
point federal funds rate target and its expectation that the funds rate
will stay “exceptionally low … for an extended period.” In explaining
its decision, the Fed not only reiterated its concern about weak labor
markets, but announced that “Financial conditions have become less
supportive of economic growth on balance, largely reflecting
developments abroad. Bank lending has continued to contract in recent
months.”

Though Kansas City Fed President Thomas Hoenig dissented again,
other officials are known to be less inclined than ever to end that
extended period. And that was the drift of Lockhart’s comments.

“(A) recovery of the national economy is proceeding but not yet
with solid and sustainable underpinnings,” he said. “Inflation appears
restrained. The outlook from here is beset by somewhat more than normal
uncertainty.”

Lockhart said “there is a chance of overachieving forecasts of
moderate growth and gradual reduction of unemployment, but at the same
time there are notable risks.”

“In my view, these circumstances suggest caution in moving away
from policies designed to give the economy the best possible prospect of
recovery with full employment,” he concluded. “Adjustment of monetary
policy will be needed eventually, but this is not the time.”

“Recent developments make me even more convinced that current
policy is appropriate,” Lockhart went on. “Financial markets and many
businesses are more nervous today than a few weeks and months ago, and
it’s my view that monetary policymakers should hold to a guarded policy
stance and evaluate carefully the risk and reward of a change of
policy.”

“Normalization of interest rate policy and the size and composition
of the Fed’s balance sheet is much desired, but I believe conditions at
this moment call for patience,” he added.

Lockhart said the recovery is proceeding and anticipated it will
continue at a “modest” pace with “gradual” reduction in unemployment.
However, the overall tone of his remarks was distinctly gloomy.

“The central question is whether the recovery that is now well
under way will be sustained or will falter, resulting in a slowdown or
even a second recession-the so-called double dip,” he said.

After growing nearly 4% in the second half of last year, Lockhart
observed that “the economy has apparently downshifted a bit in the first
half of 2010″ to about 3%. He pointed to the downward revision to first
quarter GDP growth to 2.7%.

Lockhart said “stimulus spending is still at work but is much less
forceful in 2010 compared with 2009.” He said that rising consumer
spending “represented pent-up demand coming out of recession” and has
given way to a “pause” which he said “reflects the return of a more
cautious attitude influenced by stock market gyrations and other
worrisome developments, even including the oil spill.”

He said strong business spending on equipment and software also
reflected “pent-up demand following deferrals in 2009 when so many
businesses put a stop on everything but essential spending.”

Though manufacturing production has risen 8% over the past year,
Lockhart said it has been “devoid of much progress on unemployment” as
firms boosted productivity.

“Employers have increased hours of work recently but have been
hesitant to hire,” he said. “Businesses are making every effort to
squeeze as much production as possible out of their downsized
workforces.”

Lockhart summed up the ingredients of GDP rather pessimistically:
“Here’s a key point about these contributors to recovery-each could be
transitory. The economy has not yet arrived at a state where healthy and
sustainable final demand is underpinning growth.”

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