THE PRESIDENTand Introduction


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The critical conversations that follow reflect the complexities of the underlying economic issues and warrant thoughtful deliberation.

Dennis Lockhart, President and Chief Executive Officer

In looking back at the economy in 2012, this annual report examines hoped for and actual turning points on various issues that influenced monetary policy. Through seven critical conversations, we look at the year in review as it affected and was affected by monetary policy.

The national economy in 2012 did not live up to expectations. The economy grew slowly in the face of several persistent challenges, some of which we discuss in this report. As a result, employment expanded only gradually. As the year drew to a close, some sectors of the economy had finally reached a turning point. Others were still waiting for a sustained recovery to take hold.

The critical conversations that follow reflect the complexities of the underlying issues and warrant thoughtful deliberation. These conversations are enhanced by a series of video interviews with Atlanta Fed research economists and analysts. Their insights lend a unique perspective to the discussion. In addition to monetary policy, this year's annual report examines key issues in the Bank's two other core functions—bank supervision and regulation and the national Retail Payments Office, which is headquartered in Atlanta. We also recap the Bank's major milestones in 2012.

Monetary policy responded aggressively in 2012, as it has for several years. Certainly, its effects were not confined to one realm of the economy. Indeed, the broad influence of monetary policy could be seen in the nation's housing and labor markets, as well as the subdued inflation picture. At the same time, monetary policy is not a one-way street—the Fed's monetary actions throughout the year also responded to changes in economic circumstances.

The seven critical conversations tap into a few of the most important ways in which monetary policy interacted with the economy. I see these conversations as a starting point from which readers can explore in greater depth key turning points that occurred in 2012 and the ways in which monetary policy worked to address the challenges that remained. By way of an overview, here is a brief summary of these critical conversations.

Housing: The housing collapse was the catalyst for the financial crisis and Great Recession. As such, I think it is appropriate that we start our conversation by exploring this key sector. Several indicators suggest that housing reached a turning point in 2012. Indeed, housing may finally be poised to act as a tailwind to economic growth.

Labor markets: Meanwhile, improvement in U.S. labor markets was frustratingly slow. A true turning point remained elusive. The Federal Open Market Committee (FOMC) took bold action in 2012 to support a more robust recovery, which it tied to "substantial improvement" in the outlook for labor markets. The annual report shows how a "dashboard approach" to monitoring progress toward this goal may be more meaningful than focusing on a single indicator.

Small business: No conversation about the U.S. economy is complete without mentioning small business and the critical role it plays in fostering economic dynamism. The Atlanta Fed's understanding of the small business landscape and the role of small business in job creation has evolved over the years, a process that continued in 2012.

Inflation: Monetary policy is primarily responsible for influencing the rate of inflation over the longer term. Perhaps, then, it is no surprise that inflation is one of our critical conversations. Although inflation was subdued in 2012, it is one of the potential risks that the FOMC monitors as part of our cost-benefit framework. With that said, I am confident that we have the tools and the will to act if needed.

Sovereign debt: The European debt crisis was a persistent source of uncertainty in 2012, even though it seemed to reach a turning point. We discuss how spillovers from the crisis affected the U.S. economy and factored into the FOMC's outlook.

Fiscal policy: Uncertainty surrounding fiscal policy weighed heavily on the economy in 2012 and challenged the Fed's efforts to support the recovery. The annual report discusses the negative effects of this uncertainty and also explores fiscal matters at the state and local level.

Monetary policy tools: The Federal Reserve's unconventional policy tools are the topic of this conversation. Since the federal funds rate has been near zero since late 2008, the FOMC has resorted to balance sheet measures and enhanced communications to support the recovery. These policies have placed us in somewhat uncharted territory and raised legitimate concerns about the longer-term consequences. For that reason, my FOMC colleagues and I will continue to weigh the cost and efficacy of further asset purchases.

Looking forward, I believe 2013 will be a pivotal year for monetary policy, and national economic policy more broadly. Several key challenges to recovery loom large, including fiscal policy issues and still-weak labor markets. The economic recovery reached some beneficial turning points in 2012, but there are more ahead before we can be satisfied with the outcome. Monetary policy helped bring us to this point, and it will continue to influence the economy—and vice versa—in the coming year.

As you read through the annual report, I invite you to consider these seven critical conversations and others. And in the true spirit of conversation, let us know what you think.

Presidents Signature

Dennis P. Lockhart