colorado and i am proud to be serving as the president this year. i did want to take a moment to first of all welcome you and thank you for attending the conference. i think we are going to have an outstanding conference and you will have an opportunity to hear wonderful speakers. i secondly want to thank the association for the university business and economics research for coasting this conference. we appreciate their support. and i did want to tell you there are cards on the seats for asking questions, comment cards so guilaume if you want to ask a question this is an efficient way to get questions and the end of the session so we are going to be doing that at the plenary sessions, not the breakout sessions the plenary session is as we go through. so please prepare your questions as the comments are going on. it is indeed my privilege to introduce dennis lockhart, president and chief executive officer of the federal reserve bank of atlanta. his district includes florida,

georgia, alabama parts of tennessee, mississippi and louisiana. as a voting member of the fomc he brings the business person's perspective. early in his career he was with citibank for 18 years spending much of his time overseas although he was in atlanta for ten years serving as the citibank senior corporate officer in the southeast. so obviously he brings to the fomc the deep understanding of the underpinnings of finance and banking, how banks work, successful deals are structured, the difference between good loans and bad loans. it's a good thing, too, this experience because he joined the atlanta fed in march, 2007, six months before the greatest financial crisis since the great depression began. he also worked at heller international and several management and before joining the fed he was teaching at georgetown university's law school of foreign service. he's a native of california, graduated from stanford

university with a b.a. in economics and political science and has a master's degree in international studies from johns hopkins. mr. looker brings a wealth of experience as a protest in the global financial market and as a public policy maker. ladies and gentlemen, please welcome dennis lockhart. [applause] >> rich, thank you very much for that introduction, mostly accurate which is the best you can expect. i think early on monday morning, and i want to thank nabe for the opportunity to address the distinguished group of economists. today i will offer my views on the current state on the economy and the outlook. i will comment on the appropriateness of the current stance of policy, monetary policy for this outlook and the range of plausible scenarios around my base case outlook.

and i will end by discussing the policy and a strategic level and offer my thoughts on a policy framework for the near and medium term. i know you are all aware of my need to issue a disclaimer. i am not speaking for the federal research for the federal open market committee. my eighth remarks today reflect my personal thinking and me not be shared by my colleagues on the fomc or the federal reserve system. today is likely the last day you will hear from the fomc policy makers for a few days. the fomc participants generally refrain from speaking publicly about the makarov economic outlook and near-term monetary policy the week before meetings and our next meeting is a week from tomorrow.

since you might say i'm getting in the last word here i also want to emphasize i have a few more workdays ahead of me involving data review and collections, collection of opinions of my staff to the directors of the federal reserve bank of atlanta and business context. all this is to finalize a point of view that i will take to the committee next week. i don't go to the committee with an absolutely rigid position and i find my views are often influenced by the rigorous discussion at the table so please take that as a second caveat. it's also worth mentioning that my staff and i don't rely exclusively on the data to form our opinions. because the sixth federal reserve district is a pretty significant portion and resembles the national economy in an industry composition we go to great lengths to generate

grass-roots economic intelligence that supplements our analysis of the incoming data. so, to the economy. my assessment of the state of the economy and the outlook is pretty mainstream. in terms of gdp, gross domestic product, the economy is demonstrating moderate strength and the pace of growth is accelerating somewhat. the spending components of gdp are trending positively. personal consumption overall is growing briskly even while the savings rate continues at a healthy level and households continue to be leverage. retail sales excluding although are growing at a solid pace just a little below the total retail sales including although, and importantly consumer confidence appears to be gaining strength.

industry had to become industrial activity has been strong in the recent months. industrial purchasing managers reported an accelerating activity in february. the proportion of managers reporting improved orders is at its highest level in more than six years. anecdotal accounts of manufacturers in my region of the country in the southeast confirm this picture. business investment on equipment and software, a bright spot for most of last year slowed in the fourth quarter. but january orders for the core capital goods consistent with forecasts for another year of solid growth in business spending. exports which expanded strongly in the fourth quarter should also be a significant contributor to final demand in

2011. the housing sector unfortunately remains a soft part of the picture of the otherwise encouraging picture. the house inventories although down from the peak relative to sales remain elevated. prices of homes are still falling at the year end and may still be seeking a bottom. residential construction picked up a little in january but remains very weak. in sizing up the likelihood that sustained growth. it's useful life and to compare early 2011 with early 2010. it's true the gdp growth was slower at the end of 2010 than at the end of 2009 and will likely be somewhat slower in the first quarter of this year relative to last year.

despite that, i have more confidence in the fundamental strength of the economy than i did a year ago. a year ago the handoffs between public sector stimulus and private demand didn't occur as smoothly as anticipated and some of the growth in the early part of the year was clearly borrowed from leader in the year. in addition statistics at the end of 29 and the beginning of 2010 were dominated by changes in inventory. in contrast as 2010 ended changes in inventory exerted a significant drag on the gdp growth. unlike the beginning of last year, recent gdp growth has been dominated by strong growth and private final demand. the stronger growth in consumption and investment by households and businesses along

with a stronger demand for exports gives me more confidence that in the sustainability of economic activity than i had at this time last year. my views on inflation also fall in what i would argue is the central tendency of economists and professional forecasters. but on this element of the economic picture there's more divergence of opinion. here's the inflation situation as i see at. there has been some acceleration of headline consumer inflation over the past three months mostly coming from food and energy prices. according felicia has also firmed. in my opinion this firming is not undesired. it puts the recent trend in a zone at around 2% or a little less that most fed policymakers

consider in line with our congressional mandate for price stability and maximum employment. policy makers generally don't like to see inflation dipping too close to the zone of deflationary, that is declining prices and wages. today in reaction to the rise in headline inflation there is considerable public concern that the recent rise just represents chapter 1 and consumer inflation will accelerate from here. i do not expect that to happen. producer price inflation is on the minds of many in the business community. throughout the fall we were not hearing business contacts claim much if any pricing power. now, however, we are hearing some of the were business contacts expressed conviction they can push through price

increases and plan to try to do something over the course of the year. that said, my sense of the moment is there still is concern that demand is fragile and pricing power too limited for most markets to take extensive price increases. to recap, one can't help but notice rising inflation anxiety among the business community as well as consumers based on recent experience with highly visible and highly publicized commodity prices. so far this anxiety has not translated to the loosening of the inflation expectations. the treasury and glisson protected securities markets for instance indicates longer-term inflation expectations are

holding steady. but my concern was brought inflation worries even if in reaction to what are probably temporary relative price movements could shift and cut loose inflation expectations. it goes without saying we policy makers must watch indications of expectations and very carefully and be on guard for the inflection point. in my opinion, central to the question of potential for price action becoming brought inflation is the behavior of wages. i remember the early 80's well i was in a management role in a bank and in my organization we were moving salaries around 10% to retain our people. wage accommodations of rising prices has the effect of

institutionalizing and in getting inflation. however, i do not at the moment see widespread wage pressures developing at any time soon in the circumstances of upwards of 20 million people either out of work or working part-time for economic reasons. toole federal mandate employment is the second element of the mandate. certainly friday's jobs report was encouraging particularly considering the january report that involves so much moraes. but in my opinion it is premature to declare a jobs recovery firmly established. i continue to hold the view that achieving something close to full employment will take some time. last week i spoke in tallahassee

florida on the subject of the nature of the unemployment problem. if my base case in view of the future please out, accumulating demand will favorably impact of the demand sensitive job generation. but i also think it will remain what i call a hard knot of unemployment will come down only gradually. so to summarize my outlook i expect a sustained case of growth in the range of three to 4%. inflation firming to a trend rate of around 2% and gradual employment growth. and as i said, this is a pretty mainstream view of the future. my views might depart a little from the mainstream is on the question of the range of possible economic scenarios from

this juncture. thinking about an appropriate balanced policy for of least the near term it seems to be a critical question whether the range of possible scenarios is narrow, that is a certainty is growing or widening, that is uncertainty is growing. my view is a range has widened. not a lot, not dramatically, but somewhat. for some time, my list of headwinds and risks has encompassed european sovereign debt, our own federal and municipal and state fiscal challenges, house prices and a commercial real-estate. my sense of the balance of risk has shifted with the addition of unrest in the middle east and north africa. i began my banking career as rich mentioned overseas in the

middle east and in the 70's and spent over six years in the region so why have some instinctive dispositions as i watched the events unfold. chief among these is an appreciation of how complex and unpredictable the situation is. i also constantly remind myself that seemingly distant developments can connect the unforeseen linkages and compound shock or the downside trend. nonetheless, my base case forecast sees continuing improvement, but i admit to concern about growth down sides and price upsides. with the economic information i have today, my first inclination is to be very cautious about expanding asset purchases after

june. given the emergence of new risks, however, i prefer it posture of flexibility as regards to policy options. i will continue to evaluate the incoming information as much as possible with fresh eyes as i approached each meeting and each decision. i'd like to add that i am not one to naysay the contribution of the large-scale asset purchase program to in getting the economy to its current encouraging position. i supported the decision to undertake. i viewed it largely as a defensive measure to avert a double-dip to take any prospect of the table and reverse the direction of what were at the time falling inflation expectations.

it's hard to claim causation of course but i think the policy has helped achieve a favorable positioning of the economy for sustained expansion. let me now offer some thoughts on a framework for policy decisions in the near to medium term. as tucker and i will explain the technical rationale of my reserve bank in supporting the scope of last november. through the summer and into the fall of last year our internal forecast that the fed come at the atlanta fed were calling into question whether the policy stance at that time a short progress towards the committee's growth and price stability of adjectives. in more normal times these circumstances would have prompted a cut in the fomc target for the federal fund rate.

the so-called tayler rules relates policy rate moves to forecast the misses on the fed sustainable growth and stable inflation objectives. cutting the policy but is obviously not feasible when the federal fund rate is already as low as it effectively can go. we had in hand the experience of all south one and at least some evidence of how those purchases affected longer-term market rates. the research suggested a 600 billion-dollar purchase program would equate to about a 75 basis point reduction in the federal funds rate. such a policy move was to me inappropriate response to the clear weakening of forecasted

progress towards the fomc objectives. i want to highlight the and now with this character in practical effect of traditional monetary policy easing interest rates and the less familiar asset purchases tools that we have employed since the federal fund rate hit its low were ground. i believe the fomc has operated for up least a decade with a consistent and fairly well understood rules based framework. it is within this framework that i will think about the desirability of lsap iii. a year ago, the exit plan was to focus of much discussion. but a soft patch in the middle of the air put it on the back burner. even though it personally am not

expecting an immediate need to implement an exit i think it's fully appropriate to revisit the implementation assumptions and tools readiness. as i contemplate and exit to basic and obvious questions come to mind. when will that be appropriate to undertake an exit and how to implement the upset. judgments regarding when to change the direction of policy are difficult and a lot of thought and energy is devoted to getting it right. by employing a forward looking to their rule framework when to exit is not particularly the bewildering as a problem. conceptually. upside surprises in the gdp growth and employment growth and inflation would certainly argue

for implementing exit strategies sooner rather than later. it would be nice if we were to find ourselves in circumstances in which the large bulk of the federal reserve balance sheet could be unwound passively overtime. pass it on winding would be accomplished as the securities of the first and second asset purchase programs mature. as i said, it would be nice, but i think it's highly unlikely such circumstances will prevail on the balance sheet terms it would resemble something like the current policy posture for several years. since i consider the passive unwinding probably not feasible when to implement an exit strategy. the answer to the question may be clear and concept, the timing

of when to execute an exit plan is not completely straightforward and practiced. the flags and the effect of monetary policy mean that action generally needs to be taken in advance in definitive changes in the path of economic activity and. that is why the policy framework i am describing emphasizes a forward looking construct to which the fomc would simply react. forward-looking rules necessarily depend on forecasts. which by nature are shipped with a somewhat cloudy crystal ball. i and my stuff in a landfill will be scanning for signs and i will state is in positive terms hauer growth projections remain on track and we see consistent progress in the area of employment growth and falling

unemployment and first and foremost we will be looking for signs of price pressures that are likely to build in the absence of some tightening of monetary conditions. but for those signs, particularly with respect to inflation we will certainly continue to monitor the usual forward-looking indicators. among these indicators my staff and i especially watch the more refined measures of the core inflation. we monitor the media or trend measures that have been shown to be better predictors of headline inflation over medium term horizons. we certainly want to look at measures of inflation expectations. particularly those based on the market that's such as forward break-even rates derived from the shields and we will continue

to monitor the measures of the basic cost structures that businesses confront such as movements and labor costs adjusted for productivity growth. but we have started thinking a bit outside of the box as well. at the atlanta fed we've begun monitoring a so-called sticky price index derived from a subset of consumer prices, the change relatively infrequently. the idea is that businesses which only periodically change prices have a big incentive to make pricing decisions that incorporate their best guesses of how the prices will move until their next opportunity to adjust prices. like the base measures the sticky price index will give us a measure of inflation expectations derived from people making a real decisions and

markets. unlike the these measures this to keep price index focuses on signals from the product markets that will ultimately care most about. now, as to how to exit the has been a great deal of work on the tools for the exit strategy since the beginning of last year, and those preparations had been well documented and the fomc minutes and other fed communications. briefly, the implementation of the exit strategy would involve a combination in some order of increases in the federal funds target rate supported by increases in the interest rate paid on excess bank reserves. the blocking of the reserve balances through term deposit arrangements with banks and open market reverse purchase

operations and finally at some point out right sales of assets currently held by the federal reserve banks. it's the right time now to review and refresh those plans now that we are in the latter stages of else had to. but the general approach remains workable. finally as an element of a framework for the near-term i want to push the notion of renewed focus on the monetary and credit aggregates. the anxiety about the large size of the fed balance sheets revolves around fear that results currently idle on bank balance sheets will suddenly come off sidelines. if they did get in the game faster than the economy cannot is for them there might be serious inflationary consequences.

practically speaking, i find it hard to imagine circumstances in which the credit channel would heat up so fast in such volume that brought money creation would get away from the fed can devotee to drain liquidity. but it is certainly warranted. in recent history there has not been, not been much attention put on monetary aggregates. i would argue this is not because economists and policy makers have abandoned believe in the fundamental long run relationship between money and inflation. instead, monetary measures have not factored into policy discussions for quite some time because fluctuations and money multipliers and velocity made brought measurement elusive.

financial innovation has been such a force that forecasting methodology based on the money price level of connection came to be viewed as unreliable for policy-making. it's worth remembering however that it was paul volker's return to a focus on money growth that led the way to defeating the great inflation. the fed success shed the stage for an extended period of controlled inflation approaching three decades. one closing thought, chairman volcker took extraordinary measures and response to extraordinary times. he was able to do so because the bedrock principal of central bank independence in the formulation of monetary policy was respected. the eventual unwinding of the necessary but hisor