Fed's Lockhart: Need to ensure U.S. recovery is durable

By Kristina Cooke

ATLANTA (Reuters) - The U.S. economy has entered a recovery and policymakers should now focus on ensuring it is a durable one, a top Federal Reserve official said on Tuesday.

"Now that growth has resumed, the overall objective of economic policy should be to bring about a durable recovery and an environment that reduces unemployment as quickly as possible while containing inflationary pressures," Atlanta Federal Reserve Bank President Dennis Lockhart said.

Lockhart, a voter on the Fed's policy-setting Federal Open Market Committee, said achieving this objective will "necessarily involve judicious removal of government supports and the normalization of monetary policy."

Lockhart, speaking a week after the U.S. central bank reiterated its pledge to keep interest rates ultra-low for an extended period, struck a cautious note on the recovery. The Fed cut overnight interest rates close to zero in December and has held them steady since.

There are a number of "sobering aspects" of the economic picture, he told a conference sponsored by the Urban Land Institute. However, he said it was possible to envision scenarios in which the Fed had to raise interest rates even with unemployment high.

The U.S. economy grew at a 3.5 percent annual rate in the third quarter, snapping four down quarters and likely ending the recession that began in December 2007.

But labor market conditions remain dismal. The unemployment rate surged to a 26-1/2 year high of 10.2 percent in October, and economists expect it to hit 10.5 percent in mid-2010 before subsiding.

"At this juncture, it's hard to be encouraged about a fast rebound in job growth," Lockhart said.

The Atlanta Fed chief said he expects the pace of growth to be "relatively subdued" through the medium-term. He cautioned that while there are signs of improvement, data has been "quite mixed" and the recovery has been supported by temporary government programs.

Lockhart also said policymakers should take into account trends in the ailing commercial real estate sector, as its problems could suppress the pace of the recovery.

A worry, he said, is the link between bank lending, small business employment and commercial real estate values.

However, he said he does not think commercial real estate's woes pose a broad risk to the financial system.

"As the recovery develops, the (commercial real estate) problem will be a headwind, but not a show stopper, in my view," he said.

In answer to a question, Lockhart said flat or falling consumer incomes also pose a risk to the residential real estate sector, which has appeared to be stabilizing.

"You could see the development of more stressed personal mortgages," he said.

(Editing by Dan Grebler)

Copyright 2009 Reuters. Click for restrictions.