Fed's Lockhart: US Economy Still Faces Serious Risks

It is too soon to declare turmoil in financial markets over and while the U.S. economy should gradually recover, this outlook faces big risks, a top Federal Reserve policy-maker said Monday.

"Although conditions have improved on some fronts, I don't feel we can yet "breathe easy." The path of the economy is still enveloped in considerable uncertainty, and serious risks remain," Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks.

A copy of his speech to a luncheon event for the Jacksonville Chamber of Commerce was made available to the media prior to delivery.

Lockhart is not a voting member of the Fed's interest-rate setting committee this year.

The Fed has slashed interest rates by 3.25 percentage points since last September to shield the economy from a global credit crunch. That squeeze was sparked by a U.S. housing crisis that has chilled growth and threatened to tip the economy into recession.

But Lockhart signaled he was optimistic that the country would escape this fate.

"On balance, I'm expecting a weak first half followed by some improvement in the second half as the drags on growth I mentioned earlier gradually diminish," he said.

But Lockhart also stressed that he was still concerned by the threat of renewed financial instability undermining growth.

"We remain in a period of considerable uncertainty. There are very real risks to this outlook," he said.

He said an oil price shock, further upsets in financial markets and a more severe-than-expected downturn in housing could all upset his forecast for U.S. growth to pick up somewhat in the second half of 2008.

Lockhart also said inflation was elevated "with hints of rising inflation expectations," but said it should abate as energy and food prices moderate and a softer economy limits the ability of firms to pass on higher prices to customers.

"My base case for inflation assumes a fall-off from the current elevated level of inflation supported by some moderation of energy and food price increases," Lockhart said.

"I also expect soft economic growth to constrain the ability of businesses to pass through energy and other costs and raise prices in the coming months," he added.