Regional Fed President: Pace of economic decline slows - Dayton Business Journal:

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In the normal course of our the Atlanta Fed produces a forecast ofeconomicc growth, unemployment, and inflation. Like most forecasters, we see the economy beginning to recover in the second half of this For the medium andlonger term, I expect growth will be relatively subduedx for some time after it turns My thinking is the economy has to go througbh structural adjustments that could lower the trend rate of growthn for the recovery’s firsft couple of years at least. Moreover, I believe there are ongoing threats that pose downside risks tosustained recovery. At the broadest global economic weakness constitutes acontinuingb risk.
This recession knows no borders, and the downturn has become especially severein Japan, and certain developing marketss such as Eastern Europe. Though there are promisint signs insome countries, the International Monetaruy Fund still projects global growth this year will be –1.3e percent, the most severe worldwide contraction sincs World War II. Domestically, commercial real estate is a problemn for the economy and problematic formy outlook. My forecast takee into account worsening commercial realestate -- office, retail, and warehouse, all of whichj are under stress.
But since this is an emergingt story, I don’t think we should underestimatd the scope of the problemws of commercial real estatwe and the potential disruptiom to a still stressedbanking system. Finally, in an economy built for personal consumption, thered is the risk consumer psychology and resulting consumption could turn Consumer sentiment regarding the economy has improvee but remains very low by recovery standards and coulde reverse with adverse turns in the data or worseninbmarket conditions.
Even without such a reversal, severalp factors are likely to continue to hold back consumer These include weaklabor markets, pressures to repair householcd balance sheets, and still tight credit conditions. Goinfg forward, I doubt that the financial system will accommodate the degrer of household leverage consumers enjoyedbefore mid-2007. So I’m expectinb a period of adjustment. As mentionefd at the outset, U.S. Treasury rates have risen As you know, Treasurty yields influence a broader array of market most importantlymortgage rates.
The recent rise in Treasury rates has broughrt sharper focus to the requirements of in terms of both policy and the real And theserequirements compete, to some with the requirements of transition or, more precisely, The rise of Treasury rates, or yields, has been characterizedf as both good and bad Various interpretations have been put To wit: The rise of term Treasur rates reflects the improved outlook for real growth. The rise of term Treasuryh rates signals declining risk aversion and the unwinding of the safe havehn inflows that occurredlast fall.
The rate rise demonstrated increased inflation expectations related to concerne of monetization of the burgeoning federal The rise is evidence of decreased demanf on the part offoreign investors. These and possibly otherf explanations may all be factorxs inthe market. I’m sympathetic to the good omenexplanationsw -- that the rise is connected to the improveds outlook -- but I don’t rule out that therse is something here to monitor very The steepening of the yield curve may reflec growing concern over the nation’sd ability to correct profound structural that is, to combine recovery with transition.
An immediate recoveryy that does not bring with it substantial progress in rebalancing the economy for the longe r term will not be And failure to effectively come to gripds with the requirements of rebalancing could result in unwanted inflatioj and chroniceconomic underperformance. The rebalancing agenda has been widely Amongrebalancing imperatives, the U.S. citizenry must rebalancre consumptionand savings. Connected to the country must rebalancee consumptionand investment. And above all, the worseningf fiscal imbalance mustbe addressed.
Higherf nominal rates in the term Treasuriews market can be seen as an expression of creepingb doubt that the American and more specifically thepolicy community, is up to the tradeoff decisions, and the courage of convictions the situatiom requires. The concerns about our economic path are crystallizeds in doubts expressed in some quarters about theFederal Reserve’d ability to fulfill its obligation to delivee low and stable inflation in the face of very largde current and prospective federal deficits. In a the concerns are about monetization of the resultintfederal debt. I do not dismiss thesew concerns outof hand.
I also recognize that the task of pursuinbgthe Fed’s dual mandate of pricew stability and sustainable growth will be greatly complicatede should deliberate and timely action to address our fiscal imbalancea fail to materialize. But I have full confidence in theFederalk Reserve’s ability and resolve to meet its inflationh objectives in whatever environment presents itself. Of the many riskw the U.S. and global economies stillo confront, I firmly believe the Fed losin g sight of its inflation objectives is notamong them.