Fed's Lockhart: Now Not The Time to Be Tentative

Forceful Federal Reserve policy measures will not quickly prevent a U.S. recession from getting worse, a top central banker said Friday, hinting that further bold action may be needed.

"Now is not a time to be tentative," Atlanta Fed President Dennis Lockhart told a business luncheon in prepared remarks.

Dennis Lockhart

"The U.S. economy in September and October appeared to weaken dramatically ... Problems are now broad-based," said Lockhart, who will be a voting member of the Fed's interest rate-setting committee next year.

The U.S. economy was already in recession, he said, adding growth in the fourth quarter may notch a steeper decline than the 0.3 percent annualized fall of the previous three months.

"I foresee substantial weakness at least through the first half of 2009. This weakness will exacerbate the employment picture. In my outlook, unemployment will rise some more," he said.

Data earlier on Friday showed U.S. unemployment jumping to 6.5 percent in October from 6.1 percent in September.

Since September 2007, the Fed has slashed interest rates by 425 basis points to 1 percent and pumped over $1 trillion of liquidity into the financial system to offset a global credit crisis stemming from the U.S. housing sector's collapse.

Lockhart told the luncheon, hosted by the local business community of Palm Beach County, that two things must happen before the cumulative impact of these steps gain traction.

"First, U.S. house prices need to stop falling and the volumes of defaults and foreclosures needs to stop rising ... Second, deleveraging of the financial system must run its course," he said.

Lockhart said that market conditions might have eased in recent days but it was premature to declare the crisis past.

"There have been signs of improvement lately, but concern persists that this is a false dawn and more trouble could lie ahead," he said.

On the other hand, the Fed does not have to worry much about inflation amid such clear evidence of economic problems.

"As a result of the widespread weakness in the U.S. economy, inflationary pressures appear to be declining," he said.

The Fed significantly lowered its inflation warning in its statement announcing a half percentage point rate cut on Oct. 29, which investors have taken as a sign of more easing ahead.

Interest rate futures currently imply another half point cut to 0.50 percent in the Fed's benchmark overnight funds rate at its next scheduled policy meeting, on Dec. 16.

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