–Sees ‘Exaggerated Sense of Foreboding’
–Still Sees Modest Growth, Slow Healing For Economy
–Says US Economy In His View Is Experiencing A ‘Temporary’ Downshift
–Aug FOMC Action Does Not Herald Further Expansion Of Fed Bal Sheet

By Brai Odion-Esene

JOHNSON CITY, Tenn. (MNI) – Atlanta Federal Reserve Bank President
Dennis Lockhart Friday sought to provide what he described as a “less
alarmist interpretation” of recent economic information and the Fed’s
recent policy decision, in order to counter “excessive pessimism” about
the economic recovery in the United States.

Lockhart also warned that the recent decision by the Federal Open
Market Committee to reinvest principal payments from its MBS holdings in
U.S. Treasuries does not necessarily indicate the start of further
expansion of the Fed’s balance sheet, and it does not preclude a return
to allowing it to shrink.

Lockhart, in remarks prepared for a speech at East Tennessee State
University, argued that, “generally speaking, there was too much
optimism in the early months and quarters of the recovery, and now there
may be excessive pessimism.”

He noted that heading into its August 10 meeting, the FOMC, as its
holdings of MBS ran off faster due to higher mortgage repayments and
refinancings — and in the context of a softening economy — was
confronted with the prospect of unintended withdrawal of support for the
recovery through a decline in the level of liquidity provided to the
economy.

So while monetary policy right now is quite stimulative “and
appropriately so, in my opinion,” Lockhart continued, “a small
precautionary action to avoid any risk associated with inadvertent
tightening was prudent, in my view, in the midst of disappointing
economic indicators.”

That is how he interprets the decision announced following the
August meeting to be, Lockhart said, “a small tactical change designed
to preserve the level of liquidity provided to the system.”

“I do not view it as a fundamental change of outlook or strategy,”
he said, adding, “I do not believe this change necessarily heralds the
beginning of a period of further expansion of the Fed’s balance sheet.
Nor do I think the decision precludes a return to a policy of allowing
the balance sheet to shrink on its own.”

Lockhart said he believes the FOMC’s decision has been
over-interpreted in some quarters.

“These interpretations, along with alarmist commentary about
deflation and a double-dip recession, are feeding an exaggerated sense
of foreboding,” he said.

On a day when the U.S. Labor Department reported non-farm payrolls
fell 54,00 in August, less of a decline than the consensus expectation
of -90,000 in an Market News International survey of economists,
Lockhart noted that at the start of 2010 he believed the economy was on
a path of sustained recovery, and that it would experience modest growth
and slow healing.

“Today that description still fits my broad outlook on the economy
for the foreseeable future,” he said. “I see it, the economy has slowed
somewhat but remains on a gradual recovery track with all that implies
for top-line growth for businesses and employment.”

The Atlanta Fed chief argued that the recent economic softness
reflects “the choppy, sometimes uneven transition that occurs when the
economy is shifting from public stimulus to improving private demand.”

“The economy, in my view, is experiencing a temporary downshift,”
he said.

The U.S. economy continues to improve in certain fundamentals,
Lockhart noted, and continues to strengthen defenses against a shock.

Lockhart also acknowledged that while his outlook for the recovery
was — and remains — thematically correct, “it’s also true that I’ve
been off somewhat in the particulars of the story.” Growth at the end of
last year and early part of this year was stronger than anticipated, he
said, while economic activity in the second and third quarters seems
weaker than expected.

“But such ups and downs are not unusual during a recovery,” he
assured, and it seems clear that some of the early strength was promoted
by policies that pulled forward spending from the second and third
quarters of this year — like the tax credit for first-time home buyers.

So while melding all the mixed economic data reported last month,
Lockhart said his basic view of the economy has not changed, “but my
perception of risks has shifted somewhat to the downside.”

He predicted that as the economy continues to grow, even at a
modest pace, and adverse shocks don’t materialize, negative sentiment
will dissipate.

“By the end of the year, I expect the economy will look and feel
better than today,” he concluded.

** Market News International **

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