By Yali N’Diaye

WASHINGTON (MNI) – Atlanta Federal Reserve President Dennis
Lockhart said Friday that steps towards monetary policy normalization
are more likely than “additional steps in the direction of easing,” as
he expects growth to strengthen in the second half of the year and into
2012, with inflation indicators converging towards 2%.

And should the economy strengthen as Lockhart expects, that
normalization should occur by the end of 2012, but not until economic
indicators clearly point to a sustained growth improvement, he said.

Yet, in prepared remarks at the Third Annual Rocky Mountain
Economic Summit in Jackson Hole, Wyoming, Lockhart did not dismiss the
scenario of a persistent slow growth — rather than a temporary soft
patch — in which case he would favor “keeping all options open.”

Lockhart does not see “much risk” of an outright recession.

Still, “I think a continuing flow of weak numbers through the third
quarter and into the fourth will call for a serious reconsideration of
the situation,” he said.

For now, however, it is too difficult to make a call as to where
the economy is headed, leading Lockhart to support a “wait-and-see
approach” and keep the current accommodation in place “until it’s clear
the labor market is improving again and growth indicators show sustained
improvement.”

“If we’re in a temporary slow period of a recovery that will
shortly return to faster growth, as my base case forecast suggests, I
would favor a stance of monetary policy that maintains current policy
accommodation at least until it’s clear the labor market is improving
again and growth indicators show sustained improvement,” Lockhart said.

“This assumes well-behaved inflation, of course.”

On the inflation front, he expects a leveling off, noting that
despite a rise in short-term expectations, “longer-term expectations
appear to remain well-anchored.”

Lockhart cited temporary factors that held back growth earlier this
year, including the weather, the spike in gasoline prices, the tsunami
in Japan and the European crisis.

“Uncertainty associated with the debt ceiling in the United States”
has also contributed the growth slowdown.

And going forward, the recovery assumes no such shocks will occur
and that “we will get to the other side of the U.S. debt limit matter
without serious downside developments.”

Despite the current economic weakness, Lockhart pointed out the
strong corporate profits and cash accumulation, as well as strong
foreign demand that should support U.S. exports.

“As temporary negative influences recede and positive forces gather
strength, the all-important factor of confidence should build, with the
result that consumer spending strengthens and joblessness declines,”
Lockhart said.

This should allow “renewed gradual progress on unemployment,”
Lockhart said, adding “it’s premature to abandon the expectation of a
stronger second half.”

“I’m not resigned to the view that we are dealing with economic
problems that are more persistent and intractable than I thought,”
Lockhart concluded.

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

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