UPDATE 2-Fed’s Lockhart says now is not time to raise rates

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By Pedro Nicolaci da Costa

BATON ROUGE, La., June 30 (BestGrowthStock) – The U.S. economic
recovery is still too fragile to withstand tighter monetary
policy, particularly with Europe’s debt crisis and the BP oil
spill increasing uncertainty, a top Federal Reserve official
said on Wednesday.

Dennis Lockhart, president of the Federal Reserve Bank of
Atlanta, told a Rotary Club meeting that high unemployment and
a tentative growth outlook mean inflation is not a concern.

“I don’t see inflation as much of a current worry,”
Lockhart said. “If anything, there is a small risk of deflation
that must be monitored.”

Asked whether this would prompt the Fed to try to push
borrowing costs even lower, Lockhart said: “It’s appropriate to
think about what we would do under a deflationary scenario. At
this point, no specific planning in my view is occurring but
discussion in all likelihood will be on the agenda.”

At the very least, any talk of raising rates has been
pushed back for the foreseeable future.

“Adjustment of monetary policy will be needed eventually,
but this is not the time,” he said.

Following the deepest recession in more than 70 years, the
U.S. economy began to rebound last summer, and has been
expanding ever since. Gross domestic product expanded at an
annualized 2.7 percent in the first quarter.

Lately though, economists have begun to worry about a
softening in economic activity. Many worry stubbornly high
unemployment could prompt a renewed retrenchment in consumer
spending, prompting the recovery to falter.

A simmering debt crisis in Europe has thrown another wrench
into the outlook, making it harder for the Fed to begin pulling
back from the extraordinary accommodation it has provided to
grapple with the financial crisis. The central bank not only
slashed rates to effectively zero, but also created an array of
emergency lending programs to help ailing banks.

But while helping to restore stability, such steps had yet
to completely soothe concerns about the financial sector.

“As the situation has evolved, exposure to European banks
as well as foreign and local corporations in the affected
countries has complicated the estimation of risk,” Lockhart
said.

“The concern is that continuing and possibly escalating
financial market pressures will be transmitted through
interconnected banking and capital markets to our economy.”

These fears were already palpable in global markets, with
the cost of interbank borrowing near its highest levels in a
year while the U.S. stock market teeters near its 2010 lows.

OIL SPILL AND CONFIDENCE

In his speech, Lockhart also became the first Fed official
to explicitly cite the ongoing oil spill in the Gulf of Mexico
as a direct economic threat, perhaps not surprising considering
his district is directly affected.

“I’m prepared to believe that this relentless environmental
disaster is an additional factor holding back consumer and
business confidence,” he said. “The spill dishearten us all
and, I believe, makes the public a little more reticent to
assume a smooth recovery.”

More broadly, Lockhart enumerated several looming threats
to the recovery, including retrenchment in state and local
budgets and well as a pullback from national fiscal stimulus
measures.

He also reiterated long-standing concerns about commercial
real estate.

“The economy has not yet arrived at a state where healthy
and sustainable final demand is underpinning growth,” Lockhart
said. “Normalization of interest rate policy and the size and
composition of the Fed’s balance sheet is much desired, but I
believe conditions at this moment call for patience.

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UPDATE 2-Fed’s Lockhart says now is not time to raise rates