(Photo: Reuters / Tami Chappell)
CEO of the Federal Reserve Bank in Atlanta Dennis Lockhart listens during a presentation at the American Economic Association Conference in Atlanta, Georgia, January 4, 2010.
The U.S. economy is strengthening, but its long-term sustainability is questionable, Federal Reserve Bank of Atlanta President Dennis Lockhart said Thursday in a speech on Monetary Policy and the Credit Channel.
Speaking at the annual Banking Outlook Conference in Atlanta, Lockhart said that although there are signs of a strengthening economy in recent data as well as anecdotal evidence, the 32-month-old recovery "is still getting its legs."
Looking forward, Lockhart said his assessment of the "challenges facing the unemployment gap" require "sustained, extraordinary support for what is, like it or not, a gradual process."
"The economy is generating jobs, and unemployment has come down. Still, there remain significant levels of unused and underutilized resources in the economy, especially human resources. The economy remains far from its optimal condition," said Lockhart.
"I think there's no doubt that the performance of the economy is incredibly disappointing," said Dr. Lawrence Christiano, Alfred W. Chase Professor of Economics at Northwestern University, responding to a report of the speech.
- FOLLOW IBTIMES
In light of continued high unemployment, Lockhart advocated for a continuation of the Fed's low interest rate policy with the goal of closing "the employment gap."
Moreover, low funding costs combined with high bank reserves have not created broad growth in loans, and due to supply and demand factors, "the interest rate sensitivity of the U.S. economy has been dampened," he said.
Constriction of the monetary transmission mechanism is caused by the fact that low interest rates do not currently seem to be increasing credit growth and that demand for bankable loans is not being matched despite sufficient liquidity, Lockhart asserted. The ultimate result of this is that "demand for goods and services remains subdued and the added employment that growing final demand ought to generate is slow to materialize."
However, there is debate about the Fed's policy, including a line of thought that a push to increase demand would ultimately "compromise the Fed's price stability mandate" -- i.e., its mission to contain inflation -- rather than "improve the prospects for lower unemployment," Lockhart said.
The Federal Reserve has a dual mandate under the Federal Reserve Act to maximize employment while maintaining stable prices. "Inflation is low and unemployment is high, and their legal mandate only points one direction," said Christiano, arguing that the Fed was right to focus on unemployment by keeping interest rates low.
"The number of people not working just dropped and stuck there [as opposed to the rate of unemployment]," Christiano continued. "It's incorrect to view inflation as a problem right now."
Lockhart remains cautious about expanding the Fed's balance sheet due to what he described as a "constriction of the transmission mechanism of monetary policy through credit channels."
Lockhart further expressed skepticism that an expansion of the Fed's balance sheet would provide enough benefits to outweigh "longer-term potential costs, including the risk to the Fed's medium-term inflation outlook."
In the end Lockhart's speech was not earth-shattering, as he returned to the fundamental requirements of the Fed's dual mandate. "As a policymaker, I weigh these divergent views and the policy stances they suggest by asking what policy balance will promote the most robust sustainable growth and the healthiest overall employment markets in the context of price stability."
This article is copyrighted by International Business Times, the business news leader