–Uncertainty, Hsg, Credit Market Repair To Be Headwinds To Growth
–US Economy Seems To Have Gained ‘Durable Momentum’

By Brai Odion-Esene

WASHINGTON (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Monday said he remains comfortable with his decision to support
the Fed’s “unpopular” $600 billion program of U.S. Treasury Security
purchases, arguing that it has contributed to “accumulating momentum and
a better outlook” for the economy.

He went on to warn, however, that the economy still faces “three
powerful constraining forces” in the form of uncertainty, housing and
repair in the credit market.

In prepared remarks meant to be delivered to the Rotary Club of
Atlanta, but cancelled due to inclement weather, Lockhart — who is not
a voter on the Federal Open Market Committee this year — noted that
since the possibility of large-scale asset purchases were first
discussed, the probability of deflation has declined “markedly,” and
fears of a double-dip recession have faded.

While he would not make the outright assertion that all these
developments were the result of monetary policy actions, the policy was
a contributing factor, resulting in a U.S. economy that — in his view
— “seems to have gained durable momentum as we begin 2011.”

This view is based on monthly manufacturing, international trade
and consumer spending, Lockhart said, which indicate that growth
accelerated “somewhat” in the quarter just ended.

In addition, he said despite fears that the $600 billion program
would fan the flames of inflation or hyperinflation, various measures of
inflation and inflation expectations “continue to show little hint of a
buildup of broad-based inflationary pressures.”

Lockhart also batted down foreign criticism that the Fed’s program
is intended to devalue the dollar, declaring there is no intent on the
part of monetary policymakers to influence the dollar exchange rate.

“The most critical factor in maintaining the dollar’s value is a
strong economy and stable inflation,” he argued.

But while things might be looking better, the aforementioned
headwinds are “significant constraints,” that Lockhart felt were
important enough to warrant detailed discussion in his remarks.

The first uncertainty, Lockhart said, is related to the path of the
economy in general, the regulatory environment — both financial and
others — the “big uncertainty” about how the U.S. fiscal problems will
be resolved through the political process, and the sovereign debt crisis
in Europe.

“Both Europe and the United States face profound public debt
concerns,” he said. “In this country, the challenge of budget balancing
at the state and municipal level, together with the effect of state and
municipal spending cuts, is a downside risk to an improving economy.”

And while the drag of uncertainty on economic activity persists
into 2011, Lockhart argued that the cloud of uncertainty “has lifted
somewhat,” and improved visibility could encourage more business risk
taking and consumer spending.

As for housing, “this headwind remains intense,” Lockhart said. He
went on to cite four major factors that he believes are standing in the
way of a clear turn in the housing market. These are stricter mortgage
underwriting standards, foreclosures continuing at a high level,
elevated inventories of unsold homes, and slow employment and income
growth.

As to how this pertains to the broader economy, Lockhart warned
that for many Americans, the loss of wealth associated with the fall of
home prices has been a severe shock to household finances. “I expect the
phenomenon of household deleveraging to continue,” he predicted.

With regards to the ongoing process of repair in the credit
markets, the Atlanta Fed chief said the requirements of balance sheet
repair hold back credit expansion, with conditions in the U.S. banking
system today mixed.

“On the one hand, many banks have raised new capital, repaid
government support, and seen the pace of write-offs come down,” he said,
while “on the other hand, the FDIC still lists 860 problem institutions,
and more bank failures can be expected in 2011.”

Looking further down the road, Lockhart has a more optimistic
outlook for the broader credit sector, noting that corporate debt
markets, both investment grade and high-yield, showed robust issuance
and low spreads in 2010. “That trend is likely to continue into 2011,”
he said, “I think the stage is set for some credit expansion in 2011.”

Still, the credit system is not back to full health and must adapt
to a new regulatory landscape, Lockhart cautioned.

Overall, Lockhart said he believes these headwinds “to a
significant degree reflect structural adjustments that will, in the
longer term, place the U.S. economy on a stronger footing.” The
preconditions for strong future growth are reduced uncertainty, improved
consumer and household finances, and healthy credit markets, he said.

He added that while these headwinds will restrain growth, they will
not stop it. “I fully expect growth in gross domestic product (GDP), in
personal incomes, and in jobs to be better in 2011 than in 2010,” he
declared.

The Fed official concluded that there is the potential for economic
performance this year to surprise on the upside. Businesses are
accumulating a lot of cash, he noted, a practice that cannot continue
forever, particularly in the case of public companies.

“It may not take much weakening of headwinds to unleash some of the
economic forces that thus far have been bottled up,” Lockhart said.

** Market News International Washington Bureau: 202-371-2121 **

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