WASHINGTON (MNI) – Atlanta Federal Reserve President Dennis
Lockhart said Thursday that, “I continue to support the current stance
of interest rate policy” but “as the economy continues to improve and
financial markets find firmer ground, extraordinarily low policy rates
will not be needed to promote recovery and will become inconsistent with
maintaining price stability. The implication is that the policy rate may
have to begin to rise even while unemployment is considerably higher
than before the recession.”

Below is the full text of his remarks:

Thank you for the opportunity to speak at the college’s annual
business and industry breakfast. I want to congratulate Atlanta
Technical College on being named the best community college by
Washington Monthly. ATC certainly deserves such praise, but I think
community and technical colleges in general deserve praise for their
essential role in so ably preparing students for America’s always fluid
and still weak employment market. I am aware that a high percentage of
community and technical college students are older than 30. In the case
of ATC, almost 45 percent are over 30 and more than 21 percent are over
40. ATC and its sister institutions do a tremendous service in upgrading
the skills and retooling workers in our economy and smoothing the
adjustments-both macroeconomic and personal-that are necessary in a
dynamic, open economy.

This morning I want to focus on what might be viewed as a puzzling
and frustrating aspect of the economic recovery that is under way. Most
indicators suggest that overall economic activity stopped contracting
and began growing again starting around July 2009. So the economy is
approaching 12 months of sustained recovery, and yet not much has
happened in employment markets to reduce the high level of joblessness.
How can that be? During the last three quarters, gross domestic product
(GDP) has expanded at an average annualized rate of 3.6 percent. Current
estimates point to GDP growth of around 3 percent in the current
quarter. These numbers are not off-the-charts strong, but they represent
solid aggregate economic performance. Why haven’t we seen rehiring
accompany this growth? Why hasn’t employment recovered at the same pace
as the overall economy? Well, employment always lags recovery to some
extent. Following the previous two recessions, where recovery has been
modest, we’ve seen weak job growth.

The answer also lies in a surge in labor productivity growth, that
is, output per hour of work. This productivity growth has allowed the
economy to expand and firms to record better sales and profits without
yet adding many workers to payrolls. Historically, productivity has
always been strong just after recessions. So the pattern we’re seeing is
not abnormal.

Recently my staff and I have been trying to gauge the
sustainability of recent strong productivity growth and its impact on
prospects for reduction of unemployment. In the long run, labor
productivity growth is the friend of all of us. It fuels broad-based
improvement of living standards. Short term, productivity gains may be
the nemesis of those whose prospects depend on job creation.

The Federal Reserve’s monetary policy mandate from Congress is to
pursue both maximum employment and low inflation. The possible tension
between productivity and employment is a subtext of the larger story of
economic growth and inflation and the question of whether there is a
short-term tradeoff between the two. So I will try to connect the
employment and productivity outlook to my views on appropriate monetary
policy.

I should emphasize that what you’ll hear this morning are my
personal views. They are not necessarily shared by my colleagues on the
Federal Open Market Committee or in the Federal Reserve System.

Economic summary

Let me set the scene with a quick summary of current economic
conditions. As stated earlier, the broad national economy is in recovery
as indicated by GDP growth for almost a year.

In the middle of last year government spending stimulated most of
the economic growth. In the fourth quarter of 2009 and the first quarter
of this year, inventory adjustments drove a lot of economic activity.
Consumer activity over the last few months has exceeded the expectations
of many analysts. This activity has occurred even while American
households continue to deleverage, that is, pay down their debt.
Business investment in equipment and software has been surprisingly
strong considering the consensus forecast of modest growth ahead. Both
consumer spending and business investment in capital goods may just be
evidence of short-term and temporary satisfaction of pent-up demand
following deferral of spending during the recession. The end game of
this evolution is solid and broad-based final demand.

Although, as I have suggested, risks remain to a forecast of
sustained growth, I think confidence is warranted. The mix of sources of
strength underpinning the recovery will evolve. Former contributors to
growth will beget new contributors.

As a consequence of the growth we’ve seen and the positive outlook,
employment market conditions have begun to improve. Payroll employment
is estimated to have risen by about 560,000 during the first four months
of this year.

We will get another important reading on employment markets
tomorrow. Even if that report shows further gains in employment (some
forecasters expect 500,000, with 400,000 being U.S. Census jobs), it’s
fair to say there will remain a large excess of workers looking for jobs
relative to the demand for workers in the economy. Total jobs lost in
the recession and immediate aftermath approach 8 million. This gap is
likely to close only gradually. And, further, the resulting slow growth
of wages and salaries has the potential to limit growth of consumer
spending for a while.

I’ll round out this snapshot of the economy with a couple of
comments on inflation. Because of the downward pressure exerted by the
recession and the relatively modest recovery so far, the rate of
consumer price inflation has slowed quite a lot. This recent
disinflation has not yet translated into decline of longer-term
inflation expectations. Most measures of inflation expectations have
remained pretty stable. Overall, for now, the inflation picture is not a
major concern, in my view.

So, to sum up, we’ve had growth of the economy and improvement in
jobs markets. Among the factors pushing the economy forward-along with
personal consumption, business investment, and inventory effects-is
labor productivity. I’d like to take a deeper look at this element of
economic progress and its relationship to employment.

Role of productivity as an element of economic growth

To simplify a bit, there are two causes of labor productivity
growth. The first is improvements to technology that help people work
better. The second is people working harder. People might be working
harder because the companies they work for have cut employees in
response to tough economic times and are trying to keep production
levels, revenues, and earnings up with fewer people. Technological
improvements tend to be durable, but squeezing more and more out of a
diminished and, in many cases, reorganized workforce may not be
sustainable.

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

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