RTTNews - Although green shoots appear to be sprouting on the economic landscape, Atlanta Federal Reserve Bank President Dennis Lockhart warned Thursday that there are serious risks to what appears to be a recovery. Offering a mixed view of the economy, Lockhart said that while the economy may be stabilizing, it has yet to be firmly on the road to recovery.
Speaking at the National Association of Securities Professionals Annual Pension and Financial Services Conference in Atlanta, the Fed president discussed what he sees as the most serious risks in the economy.
While the economy is still in decline, the pace of that decline has slowed, Lockhart noted. He reiterated his forecast that the economy will begin to recovery in the second half of 2009, albeit at a slow pace.
My thinking is the economy has to go through structural adjustments that could lower the trend rate of growth for the recovery's first couple of years at least, he said in prepared remarks.
Moreover, I believe there are ongoing threats that pose downside risks to sustained recovery, Lockhart added.
Specifically, he expressed his worry that the global recession will continue to weigh on demand for U.S. goods, harming chances for a speedy recovery. In addition, commercial real estate remains a problem, one that Lockhart hinted could be bigger than originally thought.
I don't think we should underestimate the scope of the problems of commercial real estate and the potential disruption to a still stressed banking system, he warned.
A third risk to the economy is the chance that consumer sentiment could remain negative for an extended period of time as confidence was deeply shaken as a result of the severe recession and economic crisis.
Consumer sentiment regarding the economy has improved but remains very low by recovery standards and could reverse with adverse turns in the data or worsening market conditions, Lockhart said.
He also recognized some imbalances in the economy that need to be addressed, including the recent spike in Treasury yields. Although the rise in rates has been interpreted as both good and bad omens, Lockhart warned that the rise is something that needs to be monitored very carefully.
The steepening of the yield curve may reflect growing concern over the nation's ability to correct profound structural imbalances; that is, to combine recovery with transition, he said.
Failure to address these imbalances will make the Federal Reserve's task of achieving price stability, or staving off inflation, as the economy recovers that much more difficult, Lockhart warned.
However, he expressed his full confidence in the Fed's ability to meet this challenge.
Of the many risks the U.S. and global economies still confront, I firmly believe the Fed losing sight of its inflation objectives is not among them, he concluded.
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