WASHINGTON - While recent U.S. economic data has been encouraging, the Federal Reserve must maintain its current monetary policy stance, given current risks to the recovery, like Iran-related tensions, and the fact that several sectors remain "quite weak," Atlanta Federal Reserve Bank President Dennis Lockhart said Friday.

This does not mean he is advocating more monetary stimulus -- so-called QE3 -- he said in remarks to students at Georgetown University. Lockhart is a voter on the Fed's policymaking Federal Open Market Committee this year.

He said the credit system "isn't working as efficiently as it can, and therefore I have some reservations about employing more accommodative or more stimulative policies to try to push it through a transmission mechanism that needs to be repaired before it is fully receptive to more stimulus."

And despite the recent bout of positive data, Lockhart cautioned against overstating the strength of the recovery and the current health of the economy.

It is important that the FOMC does not tighten monetary policy "prematurely or inadvertently," Lockhart said, and the committee is working very hard to ensure there are no "misinterpretations" of its message.

He warned that "it's appropriate to be cautiously optimistic about the future, but not overweening about the health of the economy." "The directions are positive but not necessarily back to where we would like to see them."

"The directions, in general, are pretty positive. The levels of activity in a number of areas are still quite weak," he said.

These include, not surprisingly, the housing sector and the labor markets.

Lockhart also pointed to risks related to tensions over Iran's nuclear ambitions, which he said "are on my radar screen." This poses a risk to the recovery, Lockhart said, and means maintaining accommodative monetary policy is "sensible."

As for whether more stimulus in the form of additional quantitative easing is needed or not, Lockhart said his position is one of "patient vigilance."

"I want to see how the economy evolves before drawing conclusions that more stimulus is needed," he said. "I don't rule it out, we certainly have the tools to do more if the Federal Open Market Committee decides that conditions are such that the economy needs more stimulus."

Although urging a wait-and-see approach, Lockhart said the economy appears to be gaining some "traction," noting that incoming indicates conditions are getting "better and better."

Lockhart said he expects growth this year to be between 2.5% to 3%. As for prices, he said headline inflation is "spiking a bit" because of gasoline prices.

As a result, "We expect that we are going to see, and have already seen some indication -- at the headline level -- of higher inflation," he said.

Excluding the volatile food and energy components, however, "the underlying inflation picture is more benign than what you would get by just reading the short-term headlines," he said.

So looking at inflation more broadly, Lockhart said the current pace is consistent with his definition of "a reasonable performance" around the Fed's now explicit annual inflation target of 2%.

"Consequently, I'm pretty confident that the inflation picture is in a satisfactory range," Lockhart declared.

There has been recent "encouraging news" on the labor front and the recent increases in job creation should positively impact the unemployment rate, he continued, while consumer activity is "holding up."

Lockhart said he agreed with comments by Fed Chairman Ben Bernanke that more consumer activity is needed to maintain the recovery's momentum, and described the current growth in consumer spending as "modest."

Measures of consumer confidence have been "reasonably buoyant," he continued, with the public becoming more confident about the economic outlook.

Business investment continues to grow "at a nice pace" as well, he said, adding that the anecdotal evidence the Atlanta Fed receive from local businesses "is really pretty upbeat."

Lockhart was also more bullish in his outlook for Europe, saying the risk of contagion in Europe's financial system spread to the U.S. has lessened, especially given the recent restructuring of Greek debt and the approval of a second round of aid for the debt-laden nation.

Also, the cheap 3-year loans provided to Europe's banks by the European Central Bank mean he is also "much less concerned" about the state of the EU banking system.

And while this does not mean the risk posed by the euro area has disappeared, it has abated "somewhat," he said.

"I am less concerned today than I would have been some months ago about that there could be a serious effect on the U.S. economy coming out of Europe," Lockhart said.

Europe's issue now, he continued, is about improving conditions to support economic growth.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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