Wednesday, June 30, 2010

Atlanta Fed: U.S. Economic Recovery Not Sustainable; Stronger Dollar Weakens Exports

Dennis Lockhart, President of the Federal Reserve Bank of Atlanta made the most downbeat statement on the U.S. economy from a Fed official in recent months. He said today that the U.S. economic recovery is not sustainable to either raise interest rates or shrinking the central bank’s near-record balance sheet.

According to Bloomberg, he says that there is a “small risk of deflation,” and the "rebound from the worst recession since the 1930s faces risks from Europe’s debt crisis, drops in state and local spending, commercial real estate losses and the Gulf of Mexico oil spill".

“Recent developments make me even more convinced that current policy is appropriate,” “Financial markets and many businesses are more nervous today than a few weeks and months ago, and it’s my view that monetary policymakers should hold to a guarded policy stance and evaluate carefully the risk and reward of a change of policy.”

“The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth,” “I make this point not to predict a reversal of the progress made but just as a cautionary reminder to avoid counting chickens too early.”

Mr. Lockhart does not vote on the FOMC (Federal Open Market Committee) this year.

While U.S. financial firms have “rather small and manageable direct exposure to the Greek government” and other European sovereign borrowers, there’s still a risk that financial market pressures may be transmitted to the U.S. economy and that a stronger dollar may weaken demand for exports".

“This situation is our nation’s very immediate analog of the public finance pressures being felt in Europe,”

As for commercial real estate, small and regional banks, Lockhart says that “face a heavy docket of loan restructurings that may require sizable write-downs,” “Views vary on how severe a problem is developing and whether it will require an organized comprehensive resolution effort to avoid widespread damage to the economy.”

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