The outlook for a faster-than-expected U.S. recovery has been muted by rising oil prices and turmoil in the Middle East, Federal Reserve Bank of Atlanta President Dennis Lockhart said.
“Not many weeks ago, I was ready to say, with regard to growth prospects, that I could be pleasantly surprised to the upside,” Lockhart said today in a speech in Tallahassee, Florida. “I still hold to the view that I could be pleasantly surprised, but with a touch more caution.”
Lockhart is among Fed officials seeking to assess the likely impact of rising oil prices on the U.S. economy. Philadelphia Fed President Charles Plosser last month said he saw little fallout from the Middle East turmoil.
“My sense of the balance of risks has been shifting with world news,” Lockhart, who doesn’t vote on monetary policy this year, told the Economics Club of Florida. “A sober assessment of prospects for continued economic progress has to factor in not only the risk of a sustained oil shock but also risks associated with fiscal policies and politics both here and in Europe.”
Oil in New York fell for the first time in three days after the Arab League said it’s holding discussions with Venezuela about mediating the conflict in Libya, Africa’s largest oil producer.
Crude for April delivery slid 63 cents, or 0.6 percent, to $101.60 a barrel at 10:57 a.m. on the New York Mercantile Exchange. Prices have risen 26 percent in the past year.
Fed Chairman Ben S. Bernanke told lawmakers this week that while a surge in oil prices probably won’t cause a permanent increase in broader inflation, a sustained gain in energy and commodity costs “would represent a threat both to economic growth and to overall price stability.”
Lockhart said his “baseline forecast” is still for sustained economic growth of 3 percent to 4 percent over the next year or two, with inflation rising to about 2 percent. While near-term inflation expectations have risen, long-term expectations remain “quite stable.”
Lockhart devoted most of his speech to weakness in the labor market. With unemployment at 9 percent, monetary policy has a role to play in contributing to job growth, Lockhart said.
At the same time, a mismatch of jobs with workers’ skills and higher productivity growth may also be impeding growth. Lockhart said the long-term sustainable jobless rate may now be 6.5 percent to 7 percent, up from about 5.5 percent before the recession.
Bernanke reiterated his forecast yesterday to Congress that growth will accelerate this year, while he wants to see a “sustained period of stronger job creation.” Policy makers raised their estimates for growth at their meeting last month, according to minutes of the Jan. 25-26 meeting released Feb. 16.
U.S. initial jobless claims unexpectedly declined last week to the lowest level since May 2008, Labor Department figures showed today. The department may report tomorrow that employers added 196,000 jobs in February, while the unemployment rate rose to 9.1 percent, according to the median forecasts in a Bloomberg News survey of economists.
The Fed said yesterday that the labor market improved throughout the country early this year, driven by rising retail sales and “solid growth” in manufacturing.
“Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement,” the Fed said in its Beige Book report, an anecdotal account of the economy released two weeks before meetings of the Federal Open Market Committee. Its last survey, released Jan. 12, said the job market was “firming somewhat.”
The central bank was divided over whether further evidence of a strengthening recovery would warrant slowing or reducing the $600 billion of Treasury purchases, according to minutes of its January meeting. Philadelphia’s Plosser, Richmond Fed President Jeffrey Lacker and St. Louis’s James Bullard have urged a review of the purchases in light of a strengthening economy.
Lockhart, 64, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy, with Lockhart next voting in 2012.
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