Atlanta Fed chief: Economy likely to improve in 2nd half of ‘09

The president of the Federal Reserve Bank of Atlanta said Monday the economy is still sliding, but aggressive action has set the scene for improvement later this year.

In a prepared talk to the Rotary Club of Atlanta, Dennis P. Lockhart said he believes the U.S. economy contracted by 4 to 6 percent last quarter and is likely to keep shrinking at a similar pace this quarter.

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Dennis Lockhart heads the Federal Reserve Bank of Atlanta, one of a dozen regional banks that make up the Federal Reserve network.

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That would make those two quarters the most dismal since the 6.4 percent plunge during the second quarter of 1982, part of a steep, 16-month recession.

“Looking ahead, the overall economy is very weak, and I expect it will remain weak at least through the first half of 2009,” Lockhart said.

On Friday, the government issued a report that showed the economy had shed 2.6 million jobs during 2008, more than half during the last three months of the year, including 524,000 jobs in December.

The unemployment rate rose last month to 7.2 percent, the highest level since the early 1990s.

However, Lockhart said he thinks that the end of the slide is in view.

“At some point — perhaps later this year — I believe financial markets will have stabilized sufficiently to support a recovery,” he said. “So I am looking for an improving economy in the second half.”

The Fed has attacked the current crisis with a range of strategies. Among them is the high-profile effort to make borrowing cheaper by trimming short-term interest rates — a tactic often used during economic slowdowns.

As president of the Atlanta Fed, Lockhart heads one of a dozen regional banks that make up the Fed network. He became a member of the Fed committee that sets interest rates this month.

But that tool, known as monetary policy, was seen as inadequate in the credit crisis of the fall.

So the Fed has attacked the problems in other ways.

The Fed started a series of problems aimed at shoring up financial institutions with loans — short-term and long-term — purchases of various assets and “swap lines” with foreign banks. “In response to events, the Fed had to be creative,” Lockhart said.

The Fed is now buying notes and securities backed by mortgages from Fannie Mae and Freddie Mac, the two giant government-sponsored agencies that got in trouble buying and packaging mortgages, he said. “Purchases began just a few days ago.”

That approach can help nudge mortgage rates lower and restore confidence in private sector credit, he said. However, consumers remain key to a recovery.

— Staff writer David Markiewicz contributed to this article.