From Dennis Lockhart's Prepared Remarks: "ZIRP 4 Eva"

Dennis Lockhart leads the doves on parade today, by saying that there "is risk associated with
starting a process of tightening too soon.." Too bad neither he nor the other dove, Bullard, sees the same bubble risks that George Soros is believes will lead to the greatest market crash ever. Indeed, St. Louis Fed's James Bullard, speaking at the Levy Economics Institute, said the economy is not having a “super strong recovery,” but called it “robust” and “very reasonable.” When the time comes, Bullard suggested he would not want the Fed to raise rates as slowly and incrementally as it did earlier in the decade. But he said the pace will need to be “state contingent,” or data-dependent. "I would love to tell you a particular date but I can’t" because "I haven’t seen how the economy is going to perform." Brillliant. We can't wait to see when the government massaged data indicates the tightening time has come: Dow 36,000, Dow 36,000,000, or Dow 3.6E36?

Progress Report on the Recovery

Dennis P. Lockhart
President and Chief Executive Officer Federal Reserve Bank of Atlanta

Pensacola West Suburban Rotary Club, Pensacola, Fla. April 15, 2010

For my remarks today, I plan to speak
about the current economic situation and outlook and comment on some of
my concerns as I assess the sustainability of the recovery under way.

The views I will express are mine and are not necessarily shared by my colleagues on the Federal Open Market Committee (FOMC).

The economy today
The economy is well into
recovery, perhaps as much as 10 months. This view is based on quarterly
gross domestic product (GDP) growth data as well as improvement in
major economic indicators such as consumer spending, manufacturing
activity, and job growth. Positive trends are evident in a number of
data points that are the vital signs of the economy. I should add that
anecdotal feedback from contacts across the Southeast and elsewhere
conveys improving confidence.

The Atlanta Fed's base case forecast for the near term looks for
growth to continue. The pace of growth will probably be somewhat slow.
I expect moderate growth because the economy is working through some
formidable adjustments that act as drags on growth.

At this juncture, financial markets—including many credit
markets—are functioning effectively, but I should add that substantial
deleveraging is taking place in the household and private business
sector. This process is natural and healthy but is not painless or
quick.

The lackluster pace of growth I'm expecting leaves the economy
somewhat vulnerable to shocks or setbacks that might derail the
recovery. At the same time, the recovery thus far has been a testament
to the economy's capacity to move forward despite serious damage done
by the recession and the repair required in its aftermath. So far, so
good.

Here in Pensacola a maritime military metaphor should be a
comfortable device for exploring factors that could set back recovery.
Looking out to the horizon, imagine a squadron of hostile torpedo boats
aimed at us ashore. Today I want to address each of the threats I can
identify at the moment and assess their individual potential to torpedo
the recovery.

Housing
First, the housing sector. This sector
was "ground zero" in the financial crisis, and the sharp falloff of
construction and employment contributed greatly to the ensuing
recession. It's a widely held view that stabilization of the home sales
market—and the housing sector more broadly—is essential for a sustained
recovery. I agree with that view.

During the recession, we experienced large declines in residential
construction, house prices, and sales. In recent months, the housing
sector appears to have leveled out and is bumping along a low bottom.

Total housing starts have begun to make modest gains from their low point in April 2009.

Home prices stabilized during the second half of 2009, and early
readings this year have shown that prices are holding relatively
steady, with slight declines and increases, depending on the market.
Although foreclosures have abated somewhat, nearly a quarter of all
residential properties with mortgages were in negative equity at the
end of last year, a slight increase from a year earlier. Looming
foreclosures could continue to dampen a rise of home prices.

New and existing homes sales rose sharply in the second half and
then fell off just as sharply. The supply of homes for sale, as
measured by months of inventory, declined during the second half of
last year but then increased again.

Clearly, it is difficult to know with certainty the true health of
the housing market in the absence of government support, specifically
the homebuyer tax credit.

My overall conclusion is that we should not expect a full return to
precrisis levels of construction activity, prices, or homeownership for
some time. But I do think the needed housing sector stabilization is in
process. And stabilization is a necessary precondition to rebuilding
some of the sector's previous strength.

Commercial real estate
Let me turn to
commercial real estate (CRE). I've been watching developing challenges
in this sector for well over a year, and I think much of the adverse
impact remains ahead of us. The loss of occupancy, the loss of
operating cash flow, and the resulting loss of property value is
colliding with loan maturities in banks and securities. Much
restructuring is required.

Commercial real estate is a general concern because of
its potential spillover effects to the broad economy for at least the
medium term. I have spoken in earlier talks about the linkage of CRE
losses to the banking system—particularly small and regional banks—and
credit flows to businesses and consumers.

We know it's going to be bad for the parties directly involved. The question is, How bad will the spillover effects be?

Let me summarize the situation in commercial real estate. While
delinquencies and loan losses on commercial mortgages are expected to
continue to rise, there is evidence that some property markets are
stabilizing.

Investment demand for certain property types appears to be
increasing. Commercial mortgage originations steadily increased in
2009, and property sales increased toward the end of the year. There
are indications that private capital is returning to commercial real
estate markets.

Even with the recent evidence of improvement, prices are down more
than 40 percent from their peak. The decline in prices creates
significant challenges for borrowers and lenders trying to refinance
the $1.4 trillion in loans that are expected to come due over the next
four years, half of which are currently underwater.

These problem loans will greatly strain banks whose balance sheets
are heavily concentrated in CRE, and the FDIC expects the result to be
more bank failures this year than last. Smaller banks will have the
toughest time because of their greater relative exposure to CRE. The
loan portfolios of small banks—with less than $10 billion in
assets—have three times the exposure of CRE loans relative to their
capital base compared with the exposure of larger institutions, with
more than $50 billion in assets.

So, to return to the spillover question, my view today is that
commercial real estate will be a drag on the economy but won't torpedo
the recovery. In the context of the national economy, the problem is
manageable and will be managed. I am encouraged that, so far, the
stakeholders—borrowers, banks, creditor groups, and new investors—are
working the problem and executing restructuring solutions.

Greece
A third concern arises from the daily
headlines, and this is Greece and the European Union's (EU) handling of
the Greek fiscal crisis. The news has alternated between comforting and
disquieting almost on a day-to-day basis. The Greek sovereign debt
story is a concern because it feeds anxiety about another shock to the
global banking system—particularly European banks—as well as the
potential of a broad retreat from sovereign debt exposure affecting
interest rates and recovery prospects here in the United States.

The latest news is that EU leaders have agreed to a backstop plan—a
combination of EU bilateral loans and International Monetary Fund
assistance—that will be implemented if Greece runs out of
market-oriented fund-raising options.

Recently, the concern has centered on a potential bank liquidity
crisis. Depositor and investor focus has expanded from the public
sector alone to more general Greek exposure. At the moment, it is
unclear how threatening these liquidity problems are.

The Greek fiscal crisis is unfolding in real time and remains, at
this juncture, unpredictable. So far the problem has been isolated to
Greece even though there are other countries under serious fiscal debt
stress. A generalized investor retreat from sovereign debt has not
materialized. The Greek drama has not threatened U.S. Treasury
auctions, and the U.S. banking system has very limited direct exposure.
However, the financial crisis has taught us that we can't be relaxed
about stresses in financial markets, no matter how distant and isolated
they appear to be.

For that reason, the situation should be watched carefully.

State and local fiscal stresses
Closer to home,
there is appropriate concern about our own fiscal stresses and their
possible negative effect on the recovery. I'm referring to fiscal
problems at the state and local government levels in particular. The
government sector overall makes up about 20 percent of GDP. State and
municipal governments represent about 12 percent of GDP.

State and municipal governments across the country are now
implementing painful spending cuts and tax increases to close large
budget gaps. The federal stimulus package, rainy day funds, and lowered
contributions to pensions and other accounting adjustments have
forestalled some of these cuts. But now—with a lag—the potential drag
on local economies is materializing.

States still had budget gaps in excess of 10 percent for fiscal year
2010. As federal government aid to states is waning, states are working
to close an additional 11 percent gap in the coming fiscal year and
project shortfalls of a similar magnitude in 2012.

At the same time, cities confronted budget gaps of roughly 3 percent
last year, according to a survey conducted by the National League of
Cities. Because of lags in adjustments to the property tax digest and
continuing declines in funding from state governments, cities aren't
expected to begin recovery until 2012.

Despite these challenging problems, I see state and local government
belt tightening as a long-term drag on the recovery with varied effects
at the regional, state, and local level, but not an outsized near-tem
vulnerability. Fiscal adjustment is occurring, fortunately, in the
context of a now growing private economy. Adjustment will proceed but
shouldn't imperil broad improvement of economic conditions.

Private spending
Private spending will
certainly have a big impact on the fate of the recovery. Private
spending has two dimensions: personal consumption and business
investment spending. The confidence that underpins consumer behavior is
linked to employment conditions and household wealth. Growth prospects
and the degree of medium-term uncertainty shape business spending.

As regards the factors influencing consumer spending, unemployment
rose last fall to above 10 percent, the highest since the 1981–82
recession. Declines in home values and equity prices put significant
pressure on the balance sheets of consumers. Through the fourth quarter
of 2009, the net worth of households was about 18 percent below its
peak in the second quarter of 2007.

While consumer spending contracted sharply during the recession, the
consumer is coming back. Real personal consumption expenditures (PCE)
rose in February for the fifth consecutive month.

Much depends on the labor market. Income follows employment, and
consumer spending follows income. The jobs picture seems to be
gradually strengthening. The private sector added nearly 50,000 jobs
monthly on average during the first quarter of 2010, but, clearly,
stronger growth is needed to bring down the unemployment rate.

Recent data also suggest that the second component of private
spending—business investment—is likely to continue growing. Spending on
equipment and software grew at a solid pace in the fourth quarter, and
durable goods orders, which are forward looking, suggest continued
expansion.

For the general economy, I'm encouraged by growth in both categories
of private spending. However, powerful forces are still restraining
consumption and investment spending, and consequently I don't think
it's realistic to expect spectacular growth in either in the coming
year. But I do expect solid advances in private spending to be one of
the key economic stories of 2010.

Inflation
My final concern is the risk of a
surge in inflation and its advance warning, inflation expectations.
Understand this is not in my forecast, but the concern is that
unwelcome price developments could limit the Fed's ability to provide
policy support for a gradual recovery.

As the global economy has moved into recovery, the prices of energy,
metals, and other raw material commodities have risen. These market
movements have led some analysts to fear greater pressure of
pass-through of commodity price increases, which could add a cost-push
dynamic to the inflation picture.

While some categories of prices have gone up, aggregate measures of
prices are indicating disinflation and not rising inflation. For
example, yesterday's consumer price index (CPI) report indicated that
retail price growth remains in check. The overall index for last month
rose 2.3 percent on a year-over-year basis, and the core CPI was up
just 1.1 percent.

Additionally, large amounts of resource slack have given businesses
little pricing power, and underlying wage and price trends have
continued to ease. Our directors and business contacts around the
Southeast have confirmed anecdotally this view on current inflation
pressures.

Despite the lack of evidence of current inflationary pressures, some
have expressed concern about the potential inflationary consequences of
the Fed's very aggressive monetary measures taken in response to the
financial crisis and recession. As a result of those measures, the
Fed's balance sheet more than doubled in size.

Discussion among market participants and Fed observers has focused
in recent months on whether the Fed can engineer a policy exit, that
is, an optimal shrinking of the balance sheet. Much planning, market
testing, and consultation has already been performed in anticipation of
an eventual exit. I am very confident that the Federal Reserve will be
able to manage the normalization of its balance sheet with appropriate
timing and pace. I do not expect inflation to change the course of
economic recovery over my forecast horizon.

So far, the public seems to agree. The stability of long-term
inflation expectations, in my view, is signaling confidence in the
Fed's ability to conduct a successful exit from stimulative policies.

Monetary policy comments
Let me close with some thoughts on the implications of the views I've expressed for the stance of monetary policy.

As a central banker, I keep a worry list. A good part of this talk
has been a survey of my concerns. These points of vulnerability have
been identified in recent months and weeks by many other public
officials and commentators. Such public recognition of a problem, a
risk, a vulnerability often sets in motion focused efforts to address
it by a variety of relevant actors. And often the outcome is better
than the original estimates of potential impact precisely because the
problem is being worked.

Given the current state of the economy, I am very comfortable taking
a personal position that is neither sanguine about these potential
torpedoes nor unduly alarmist or defeatist. I take comfort that each
big problem that is actionable is being addressed, and the recovery is
moving forward. As I said earlier, so far so good.

Having said that, I believe the recovery requires continued support
of accommodative monetary policy. I think there is risk associated with
starting a process of tightening too soon. In my view, the strong
medicine of low rates should remain in place to facilitate adjustment
processes that are by their nature gradual.

Comments

[HarryWanger]

As I said yesterday, this is one of the main reasons we will continue to all time highs with relatively shallow pull backs. Can't fight these guys. Markets will continue the run until the language changes.

[Shameful]

I'm waiting for all the Fed Heads to go out and get matching ZIRP-For-Life tattoos. 

[trillion_dollar...]

ZIRP4EVA CUZ LIQUIDITY IS PROSPERITY

[whatsinaname]

Am buying 2012 deep out of the money puts haha...

Meanwhile sheeple cannot blame the Fed or bankers if they lose money this time. Know quite a few who are buying the "recovery" talk and loading up on 401k equity funds.

[verum quod lies]

So, everything is fine and he forecasts sunny days ahead, but since he can't accurately forecast the future so stick with ZIRP? Well his words:

"The economy is well into recovery, perhaps as much as 10 months."

"The Atlanta Fed's base case forecast for the near term looks for growth to continue."

"I believe the recovery requires continued support of accommodative monetary policy. I think there is risk associated with starting a process of tightening too soon. In my view, the strong medicine of low rates should remain in place".

If things don't turn out as he expects, would it be too much to ask for his resignation? Also, as a friend would often remark after such an analysis, I wonder what drugs he's taking, we need to get some.

[Mr Lennon Hendrix]

Raise the interest rates and the US owes a gazzilion doelarrs on its debt.  It will never happen.

[verum quod lies]

At some point real interest rates will go up significantly, and that is more assured each day they stay down. There is no truly free lunch, you pay at some point and in some way.

[BS Inc.]

I think the market will tighten for them, when push comes to shove.

[Augustus]

A higher rate on Treasury borrowings leads to a higher rate for all loans.  The tax rate on that higher rate that everyone else receives would more than offset the higher rate on the govt. debt.

Driving the rate below 1% or 1.5% is simply nonsense.  If a deal cannot make sense at a 4%-5% rate (govt rate plus premium) it probably should not be done.  The result is fictional profits and straw houses.

[Hondo]

Complete BullShit.  The reason rates will not rise is what Willam White said.......because it would lite the debt bomb fuse.  The problem is they are doing nothing to eliminate the debt so we, like Japan, will be a zero 4 eva.

[verum quod lies]

Forever is a long time. The Greeks have been trying to get beyond the next three months, the U.S. is trying to ZIRP it one week at a time. I repeat, there is no free lunch, at some time and in some way payment will come due.