Federal Reserve President Sees “Lackluster” Recovery in U.S.

The economic recovery in the United States will be “lackluster” because of weak consumer spending and strains in the financial market, Federal Reserve Bank of Atlanta President Dennis Lockhart said.

In a speech yesterday in Jacksonville, FL, Lockhart stated, “Over the medium term, I see a slow recovery with ongoing repair of the financial sector,” Lockhart continued, “There are risks to even this lackluster outlook.”

The Federal Reserve announced yesterday that 11 out of its 12 regional banks stated that they saw signs of a stable and improving economy during the months of July and August, adding to the speculation that the worst recession since World War 2 may be over. Other statistics indicating that the recession may be over include lower than expected first time claims for unemployment benefits and an improving stock market.

Last month, policy makers stated that the economy seemed to be in a period of leveling out and that a gradual resumption of growth will likely occur during the second half of the year, however consumer spending, which represents 70% or more of the nation’s economy, continues to be hampered by “job losses, sluggish income growth, lower housing wealth and tight credit.”

Lockhart stated, “Although consumer confidence is rising, actual consumption has remained muted overall. Consumers remain cautious because of employment concerns and wealth loss. Households continue to deleverage, that is, pay down debt.”

Unemployment rates are expected to reach 10% by the beginning of 2010 and an overall decline on household wealth leads many to doubt the strength of an economic recovery. The total amount of consumer credit fell by a 10% annualized rate during the month of July to $2.5 trillion, according to a recent Federal Reserve report.

To bolster the economy, the nation’s central bank lowered its main interest rate to almost zero during the month of December and vowed to purchase as much as $1.75 trillion worth of Treasuries and housing debt to reduce borrowing costs. In his speech, Lockhart told reporters that the Fed may not purchase $1.25 trillion worth of mortgage backed securities that it has authorized.

“Flexibility to do what was needed but not necessarily go to the absolute top number that the program had been publicized as its ultimate target,” Lockhart said. “It is not inconceivable we will decide to do less.” He continued, “My grasp of the issue is how to phase out the program in a way that doesn’t unnecessarily distort the markets.” Policy makers “have studied the tapering off of that program as one option.”

There’s not total agreement as to whether or not the Fed should end its purchasing program prematurely. Although Federal Reserve district bank presidents Jeffrey Lacker of Richmond and James Bullard of St. Louis both have stated that the central bank might not need to complete its purchase of mortgage backed securities, New York Fed President William Dudley stated that an exit of the program might be “premature.” Chicago Fed President Charles Evans said yesterday he supports following through with the purchases.

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