Fed's Lockhart sees protracted high unemployment

on August 26 2009 2:32 PM

The U.S. economy is in the early stages of recovery but it will be a while before growth starts to bring down unemployment, a top Federal Reserve official said on Wednesday.

My forecast envisions a return to positive but subdued gross domestic product growth over the medium term weighed down by significant adjustments to our economy, Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks.

My forecast for a slow recovery implies a protracted period of high unemployment, Lockhart, a voting member of the Fed's policy-setting committee this year, told the Chattanooga Area Chamber of Commerce in a luncheon speech.

U.S. unemployment stood at 9.4 percent in July and is expected to peak at 10 percent later this year as companies slashed payrolls in the face of the longest recession since the 1930s Great Depression.

Lockhart also made plain the recovery faced challenges, notably problems in commercial real estate, while businesses remain cautious and credit conditions were still constrained.

The Fed has cut interest rates to almost zero and flooded markets with hundreds of billions of dollars to keep credit flowing and prevent the downturn from being much worse.

Lockhart said he supported the Fed's stated plan to keep rates low for an extended period, and he expected inflation to remain contained.

But Lockhart also acknowledged that policymakers could not afford to leave stimulative policies in place for too long.

The challenge my colleagues and I face is navigating between the risk that early removal of monetary stimulus snuffs out the recovery and the risk that protracted monetary accommodation stokes inflation expectations that could ultimately fuel unwelcome inflationary pressures, he said.

The Fed must deal with this tension, particularly in coming quarters, as we pursue our dual mandate of price stability and maximum employment, Lockhart added.

(Reporting by Alister Bull; editing by Neil Stempleman)

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