Atlanta Fed's Lockhart Sees Modest U.S. GDP Growth in 2010, Gradual Unwinding of Easing

Regarding the previous two quarters, Lockhart said he sees second-half 2009 U.S. GDP growth "between 3.0 and 3.5%" but added that he expects the pace of the expansion "to be slow over the foreseeable horizon." He added that, "As Friday's payroll employment report indicates, getting to 160,000 jobs per month could be a challenge even with GDP growing."

Lockhart also said, if his outlook proves to be accurate, 2010 will be the year the Fed exits from a lot of emergency policies put in place to fight the financial crisis and the recession, but that the pace of the withdrawal must be, "A bit like Goldilocks' porridge, the exit or unwinding process needs to be -- in my view -- not too fast, not too slow, but just right. I continue to support an interest rate policy described in recent FOMC statements as low for an " 'extended period.' "

Monetary/Economic Analysis: Interpret the above as a strong probability that the Fed's quantitative easing and low interest rate policies will remain in place through Q2, absent a rise in inflation. The longer inflation remains low, the longer the Fed will have to further stimulate the U.S. economy. The Fed is also obviously cognizant of the monthly employment trend: job creation remains a major problem, and the Fed wants to do everything it can to stimulate demand, so long as inflation remains contained.