RTTNews - A top Federal Reserve official said Monday that the economy would have to undergo significant structural adjustments before real growth could resume, but he expressed optimism about the central bank's ability to keep inflation under control.

Speaking before the Rotary Club of Nashville, Tennessee, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, predicted modest growth starting in the second half of the year, though he said there is not likely to be a strong recovery in the medium term.

While his outlook for economic growth was muted, Lockhart argued that the central bank has the tools necessary to remove the stimulus it has put into place before serious inflation sets in.

Current economic conditions are mixed at best, but the economy appears to be in stabilization mode, Lockhart told the audience, according to prepared remarks.

I expect real growth to resume in the second half and progress at a modest pace, he predicted. I do not see a strong recovery in the medium term.

The Atlanta Fed chief said that the economy still had to undergo significant structural changes in order to resume its potential growth. This will involve shifting away from the economic props that led to the near-collapse of the financial system over the past year or so.

We must build a more solid foundation for our economy than consumer spending fueled by excessive credit - excessive household leverage - built on a house price bubble, Lockhart stated.

Lockhart warned that even his prediction of a mild recovery was not a certainty. He warned that commercial real estimate poses a significant risk, with a heavy schedule of financing in this industry set for the next few years.

Refinancing problems will not directly affect GDP...but I'm concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors, he noted.

On inflation, Lockhart recognized that many experts have become worried that the significant amount of money that that the Fed has put into the system - a move that led to the massive expansion of the central bank's balance sheet - has raised the risk of inflation.

The Atlanta Fed chief assured his audience that the central bank had the necessary tools to remove the stimulus before inflation became entrenched.

I'm not saying that the current size of the balance sheet is necessarily the most appropriate, Lockhart said. What I am saying is one should not assume at this point that extraordinary measures to shrink the balance sheet are required to contain inflationary pressures.

He added, I want to assure you the Fed has several tools and is readying itself to act on the balance sheet when the time comes. And I am very confident of the FOMC's commitment to price stability.

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