BL: Fed's Lockhart Says Slowdown to Reduce U.S. Inflation (Update1)
By Steve Matthews
May 17 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic slowdown may moderate inflation that has been spurred by rising prices of energy and commodities.
``We expect inflation to abate somewhat in the second half and going into 2009 based upon our forecast of weak economic growth,'' Lockhart said in response to a question following a speech today in Atlanta. ``There is some early indication that the strength of inflation has softened.''
Lockhart's comments contrast with remarks this week by Kansas City Fed President Thomas Hoenig and Richard Fisher of the Dallas Fed, who warned about rising prices. Hoenig said inflation was at an ``unacceptable level,'' while Fisher said the economy may recover from its slowdown ``at much higher base rates of inflation than we would want.''
Policy makers indicated last month they may take a breather after lowering the benchmark U.S. interest rate by 3.25 percentage points since September. The reduction in rates this year has been the most aggressive in two decades.
U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs, the Labor Department said May 14. Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March.
Energy Prices
``The U.S. economy is in the midst of a pronounced slowdown, with very little growth recorded for two consecutive quarters,'' Lockhart said in the text of his speech. At the same time, ``the United States has experienced elevated inflation levels partially driven by a run-up of energy and other commodity prices.''
Lockhart didn't discuss the path of interest rates. The Federal Open Market Committee next meets June 24-25.
U.S. weakness, initially concentrated in housing, has undermined consumer spending, which generates about two-thirds of U.S. gross domestic product, Lockhart said.
``Personal consumption has softened,'' Lockhart told the Southern Center for International Studies at an event at Emory University. ``To the extent the world relies on strong U.S. consumer activity, this weakness could pose a threat to continued global expansion.''
For now, ``growth appears to be softening but still growing nicely'' in emerging economies, he said. While the U.S. slowdown will be felt worldwide, it won't as severe as predicted by some forecasters, he also said.
Lockhart in the question period said the U.S. economy wasn't ``technically'' in recession, adding the second quarter may show economic growth.
Global Problem
Increasing prices have become a global problem, Lockhart said, citing ``unrest'' over food prices in several countries.
``Recently inflation in many parts of the world has begun to pick up,'' he said. That ``is a growing issue for emerging economies.''
U.S. consumers expect an inflation rate of 5.2 percent over the next 12 months, according to a Reuters/University of Michigan survey on May 16, compared with 4.8 percent in the April survey. Longer term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.
Lower demand for energy could bring a reduction in those prices, Lockhart added in the question period, saying prices were likely to be ``somewhat lower but relatively high.''
The U.S. should take a ``realistic'' view of sovereign wealth funds, Lockhart also said, echoing comments made May 15 by Fed Chairman Ben S. Bernanke. The funds have accounted for about one-third of the capital raised by financial companies during the credit crisis, the Fed chief said.
``There has been a fair amount of hand-wringing recently about sovereign wealth funds accumulating U.S. assets,'' the Atlanta Fed official said. ``I believe our posture has to be realistic. One country's trade deficit -- ours, in this case -- is another country's investment surplus.''
Lockhart, responding to questions, said the U.S. dollar would remain ``the dominant currency'' in the world even though some countries may diversify their reserves.
To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.
Last Updated: May 17, 2008 11:12 EDT
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