US economy may grow 3 percent in second quarter, Lockhart

Dennis Lockhart, president of the Federal Reserve of Atlanta, believes the US economy may grow 3 percent in the second quarter of 2014. He added that after a recent lull, the housing market will probably pick up again.

After an American Business Council of Dubai event at the Dubai International Financial Center, Mr. Lockhart told reporters when asked about the US economy during the second quarter:

“It is little early to say based on data. But I am pretty confident it will be at or exceed 3 percent in the second quarter. Generally, I see the housing market improving and contributing to this picture of a better economy.”

Reverse repos set to become permanent

A policy tool that allows financial institutions to place cash with the Federal Reserve (Fed) in exchange for Treasury overnight loans will probably become adopted more permanently as a way for the Fed to help control short-term interest rates, Lockhart added.

Known as “reverse repos”, they have become popular since testing started in September 2013. By controlling the interest-rates linked to these transactions, the Fed hopes it will be able to set a limit on overcharging short-term interest rates.

Mr. Lockhart said:

“Overall I am confident that reverse repos will be among our tool bag and therefore may very well have a role in how we try to influence short-term interest rates.”

During congressional testimony last week, Fed chair Janet Yellen said that the reverse repo tool was likely to be a permanent monetary tool by the time interest rates start rising.

US short-term interest rates have been close to zero as the Fed tries to stimulate the economy while it recovers from the second worst recession in modern history.

When will interest rates rise?

As more and more data coming out of the US suggest an accelerating recovery, talk about when the Fed might raise interest rates has been growing.

In April, 288,000 new jobs were added to the economy, and the unemployment rate fell to 6.3% from 6.7%, the lowest level in six years.

Mr. Lockhart said he forecasts interest rate rises will begin during the second half of 2015.

The Fed has been scaling back the bond-buying stimulus program by $10 billion each month since the end of last year. It says it has a dual mandate: 1. Controlling inflation. 2. Achieving full employment.

Mr. Lockhard predicts the stimulus program will be phased out by the end of this year – some time between October and the end of December.

One major hiccup in the stream of positive data being reported this year in the US was a major slowdown in Q1 2014 economic growth, which barely managed 0.1%. Economist say the poor figures were due to abnormally harsh winter weather conditions. Fannie Mae’s Economic & Strategic Research Group predicts faster growth in Q2 2014 and 2.7% GDP growth for 2014.