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In the normal course of our work, the Atlanta Fed produces a forecast ofeconomic growth, and inflation. Like most we see the economy beginninyg to recover in the second half ofthis year. For the mediuk and longer term, however, I expect growth will be relativelyt subdued for some time after itturnsd positive. My thinking is the economy has to go through structural adjustments that could lowed the trend rate of growth forthe recovery’s first couple of years at Moreover, I believe there are ongoing threats that pose downside risks to sustained recovery. At the broadest level, global economic weakness constitutes a continuing risk.
This recession knows no borders, and the downturm has become especially severein Japan, Europe, and certai n developing markets such as Eastern Europe. Though therwe are promising signs insome countries, the Internationalp Monetary Fund still projects global growth this year will be –1.2 percent, the most severe worldwid contraction since World War II. Domestically, commerciall real estate is a problek for the economy and problematic for my My forecast takes into account worsening commerciap realestate -- office, retail, hotel, and warehouse, all of whicbh are under stress.
But since this is an emergingb story, I don’t think we should underestimat the scope of the problems of commerciall real estate and the potential disruption to a stillo stressedbanking system. Finally, in an economyg built for personal consumption, theree is the risk consumer psychology and resulting consumptiobn couldturn negative. Consumer sentiment regarding the economyg has improved but remains very low by recovert standards and could reverse with adverse turnsa in the data or worseningmarketr conditions. Even without such a several factors are likely to continuw to hold backconsumer spending.
These includse weak labor markets, pressures to repair household balance and still tight credit Going forward, I doubt that the financial system will accommodater the degree of householde leverage consumers enjoyed before So I’m expecting a period of adjustment. As mentionecd at the outset, U.S. Treasurhy rates have risen recently. As you know, Treasury yields influence a broadere array of market most importantlymortgage rates.
The recent rise in Treasur y rates has brought sharper focus to the requirementsof recovery, in terms of both policy and the real And these requirements to some extent, with the requirementse of transition or, more precisely, The rise of Treasury rates, or has been characterized as both good and bad Various interpretations have been put To wit: The rise of term Treasury rates reflects the improved outlook for real The rise of term Treasury ratew signals declining risk aversion and the unwindingb of the safe haven inflows that occurred last fall. The rate rise demonstratexs increased inflation expectations related to concerns of monetization of the burgeoningfederal debt.
The rise is evidence of decreased demand on the part offoreign investors. These and possibly other explanations may all be factorsd inthe market. I’m sympathetic to the good omenexplanatione -- that the rise is connected to the improved outlookm -- but I don’t rule out that theres is something here to monito very carefully. The steepening of the yield curve may reflecft growing concern overthe nation’s ability to correctf profound structural imbalances; that is, to combine recoverg with transition.
An immediate recovery that does not brin with it substantial progress in rebalancing the economyh for the longer term will not be And failure to effectively come to grips with the requirementse of rebalancing could result in unwanted inflatiom and chroniceconomic underperformance. The rebalancinfg agenda has beenwidely expounded. Among rebalancing imperatives, the U.S. citizenry must rebalance consumptionand savings. Connected to the country must rebalance consumption and Andabove all, the worseningh fiscal imbalance must be addressed.
Higher nominal rates in the term Treasuriez market can be seen as an expressiomn of creeping doubt that the American and more specifically the policy is up tothe sacrifices, tradeoff decisions, and the courag e of convictions the situation requires. The concernsz about our economic path are crystallized in doubts expressed in some quarters about theFederal Reserve’s ability to fulfillp its obligation to deliver low and stablre inflation in the face of very large current and prospective federal deficits. In a the concerns are about monetization of the resultingfederaol debt. I do not dismiss these concerns outof hand.
I also recognizee that the task of pursuingthe Fed’a dual mandate of price stability and sustainable growth will be greatlyu complicated should deliberate and timely action to address our fiscak imbalances fail to materialize. But I have full confidence in theFederapl Reserve’s ability and resolve to meet its inflationh objectives in whatever environment presents itself. Of the many risk s the U.S.
and globalk economies still confront, I firmly believe the Fed losin g sight of its inflatiojn objectives is notamong
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