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ALAN TURNER: Dennis Lockhart gives reason for optimism, with a couple of caveats

Dennis Lockhart believes interest rates will rise gradually, with “no sudden jumps.”

Dennis Lockhart believes interest rates will rise gradually, with “no sudden jumps.”

R ecently, we had the opportunity to meet with Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, and one of the influential policy makers in terms of fiscal policy.

 Dennis took office in the sprint of 2007, and had just enough time to get settled in the job before the financial crunch of 2008 and 2009, brought about by the bursting housing bubble.

 “That was a challenging period, to say the least,” he said. “We were on the edge of a systemic collapse, and I cannot give enough credit to Chairman Bernanke for his vision and resoluteness in dealing with an unprecedented crisis.”

 Given the extreme peril of that period, he suggested that “we came through it pretty well.”

 He also has high regard for Janet Yellin, and feels “we’re in good shape under her leadership.”

 We quizzed him on his prognosis for the economy in the coming months and years, beginning with his outlook on interest rates.

 While there is some disagreement among other Fed officials, he thinks interest rates will rise gradually, with “no sudden jumps.” He bases his thinking on several consideration, among them the fact that the labor market, while having shown some improvement, “still has considerable room for improvement.” As others have pointed out, he said that the “marginally attached” segment of the labor market is too large to provide the economic growth. He points out the number of people who have either left the market entirely, or who can find only marginal part-time jobs when they would prefer to be working full time.

 Asked whether he sees a developing equities bubble, he said “I wouldn’t call it a bubble, but with that said, some segments of the market are very highly valued.” That could suggest an impending correction, in his view, but he doesn’t see any massive drop in the stock indexes.

 What about housing?

 “I’d say we’re in the middle period of the housing recovery,” he suggested. “The early period was driven by investors who bought numerous homes and turned them into rental properties. That activity has slowed. At the same time, we’re seeing a reticence on the part of first time homebuyers to make the commitment to buy. This is probably due in part to excessive levels of student debt.”

 Suggesting that he is guardedly optimistic on continue economic growth, he sees strengthening GDP growth in the coming quarters, suggesting that “I think we can manage through our fiscal challenges.”

 One of the challenges we asked him about was the potential impact of rapidly increasing entitlement spending, particularly Medicare.

 “Well, we’re currently running a deficit level of about 3 percent of GDP, which is an acceptable number when compared to the world’s developed economies. Medicare may not be the problem that many seem to think,” he said. “In my view, if we can generate a strong enough economy, we can manage through the ramp-up in entitlement spending.”

 What will it take to strengthen the U.S. economy?

 “We need the right policies,” he said.  “We need an incentive structure favorable to new business. We need to reform the tax code.  And we need the right balance of regulation that will provide a hedge against another financial crisis and yet encourages reasonable levels of investment and risk.”

 We asked whether the potential for a new recession in the EU would bring financial pain to American shores.

 “I don’t think so,” he said. If they weaken, and we do the right things here, it could actually provide us with some opportunities. We’ve attacked our financial problems directly, and that isn’t necessarily the case in parts of Europe.”

 Is business, and particularly banking, over-regulated?

 “I think you could make a case that some of the smaller community banks in Mississippi and elsewhere, are having to deal with compliance issues that are greater than they should be,” he said.  “Overall, though, I think the new regulations are by and large doing what they’re supposed to do.”

What’s his prognosis for Mississippi?

 “Generally, I think there’s an upbeat and pro-business feeling in this state,”  he said. “That doesn’t mean everything is great — Mississippi has issues with unemployment, weakness in the gaming industry, and possible exposure in the defense industry. But generally, I’m optimistic for Mississippi’s future.”

 Finally, we asked him what keeps him up at night.

 “I’d have to say it is the threat of a geo-political event,” he said. Something that we can’t foresee or plan for. There are numerous flash points in the world at present, and some events could be game changers from an economic perspective. You just can’t anticipate everything.”

 It seems that there’s always a lurking caveat or two to keep life interesting.

Contact Mississippi Business Journal publisher Alan Turner at alan.turner@msbusiness.com or (601) 364-1021.

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