Lockhart: Economy Faces “Vexing Uncertainty”

The economy will go through a period of “vexing uncertainty” as weakness persists into 2009, according to Federal Reserve Bank of Atlanta president Dennis P. Lockhart.

“The situation has been fast-moving and complex,” Lockhart told the Buckhead Rotary Club in Atlanta yesterday, according to prepared text of his speech, which was released by the Fed. “To make sense of it we can identify four dimensions. First, there is the institutional dimension, the micro level of individual firms — the stress endured by individual banks and companies as they cope with developments in the markets. Second, there is the credit system dimension — the dysfunction of the economy’s circulatory system as evidenced by constricted short-term funding markets, bond issuance, and flows of bank credit. Third, there is the investment capital markets dimension. In recent days the world has been fixated on gut-wrenching declines in equity markets. And fourth, there is the general economy dimension — the spillover effect of financial turmoil and constrained credit on the nonfinancial economy.”

What distinguishes this crisis from those in the past, Lockhart said, is the “forceful response” of the Treasury Department, Congress, the Federal Reserve, and foreign governments.

Lockhart said he believes these policies will work. In addition, he said, “I anticipate further dissipation of inflationary pressures. Nevertheless, given high inflation readings during the summer and into the fall, I’ll continue to watch developments closely.”

The Atlanta Fed expects “weakness to persist for some time into 2009 as credit markets gradually improve. The thawing of credit markets is a necessary condition for a recovery back to levels of growth consistent with the economy’s underlying potential.”

“Atlanta, along with the rest of the nation, is experiencing a period of financial turmoil and economic downturn,” Lockhart said. “I am confident this will pass, and the solid strengths of our city — and the nation, too — will express themselves in a return to health and growth.”

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