Lockhart Discusses Fed Actions in Response to Economic Uncertainty

For immediate release: Sept. 28, 2007

MURFREESBORO, Tenn. — Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, today discussed recent economic uncertainty and his process for making a recommendation on monetary policy ahead of the Sept. 18 Federal Open Market Committee meeting.

In his remarks at Middle Tennessee State University's Economic Outlook Conference, Lockhart said that because of recent financial volatility he believed the balance of risks to the economy had shifted from higher inflation toward slower growth. He added, "While inflation is currently at the upper bounds of my comfort zone, the Fed has made progress against it. That's why I believe the recent moderation of inflation readings allowed a tactical move to reduce risks to the general economy with a fed funds rate cut."

Lockhart also responded to criticisms that Fed policy actions to lower rates may entail moral hazard. Noting that he considered the financial turbulence in the context of potential economic weakening, he said, "I did not see the logic of subordinating the general welfare of our nation's economy to the possibility that some participants in financial markets might draw tainted conclusions about the future landscape of risk. My view is that fulfilling the Fed's institutional purposes takes precedence." Federal Reserve purposes are financial stability, price stability, long-run economic growth, and maximum employment, he added.

With regard to the economic outlook, Lockhart cited housing, consumer spending, and business investment as factors that bear close attention. According to him, the persistence of the housing downturn has likely exerted some drag on consumer spending, which represents about two-thirds of U.S. gross domestic product. "If the housing downturn intensifies, I believe consumer spending is vulnerable to further weakening related to slower home equity extraction and reduction in overall household wealth," he said.

Lockhart added he believes that financial conditions improved following actions by the Fed and other central banks. "Stress in the asset-backed commercial paper markets has shown signs of abating," he said. "Time has a healing quality, and I believe the healing process will be supported by further disclosure, more rigorous risk evaluation, and a more deleveraged financial reality. Of course, more financial volatility is possible, so I'll be watching this area closely."

A transcript of Lockhart's remarks is available on the Atlanta Fed Web site.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.

Contact: Marc Fordham 404-498-7324