Fed's Lockhart says U.S. banks still under strain

TAMPA, Florida (Reuters) - The U.S. banking system remains under strain and it will be a number of months before there is clarity on its capital requirements, Atlanta Federal Reserve President Dennis Lockhart said on Tuesday.

"We are certainly not out of the woods in terms of stabilizing the banks and we have some months to go through (to) ... identify the capital needs ... after stress-testing," Lockhart told a forum at the University of Tampa, referring to the country's top 19 banks.

Lockhart is a voting member of the Fed's policy-setting committee this year.

The U.S. Treasury is subjecting the country's top banks to strict examination to understand how much additional capital they might need if a year-long U.S. recession gets much worse.

The Fed has cut interest rates to almost zero and more than doubled the size of its balance sheet to around $2 trillion through programs to support private lending.

Lockhart said he still expected U.S. economic growth to turn positive in the second half of this year, but warned this outlook was subject to "substantial" risks, citing the commercial real estate sector and weaker global growth.

Housing would also find a bottom this year as lower home prices and more affordable mortgage rates stimulate demand, but confidence will dictate when this turn comes.

"The purchaser simply has to believe that it is time to act," Lockhart said.

On the other hand, emergency measures to restore growth have gained traction in credit markets receiving Fed support.

"We will get through this. The policy set that is attacking the problems is attacking them forcefully and with sufficient scale," he said in response to an audience question.

"So I remain optimistic that in 2009 we will see the bottoming out of the elements of the economic downturn and begin to build on the future."

Lockhart said that massive expansion of the Fed's balance sheet undertaken to support consumer spending was not a source of inflation at the moment, but would have to be reversed as growth picked up steam.

Rather, the economy faced more risks from disinflation, with certain price categories falling, although the danger of either a serious round of inflation, or Japan-style deflation with prolonged and widespread price declines, was not large.

Lockhart also told the audience that he did not expect the U.S. government to run into substantial difficulties in financing its borrowing needs, after President Barack Obama unveiled a multitrillion-dollar budget.

"For the time being, the bond issues of the U.S. government remain very, very much in demand by investors all over the world," Lockhart said.

But he also acknowledged that many people wondered if this demand was sustainable, and conceded that it had been the purchase of U.S. investments that sent the crisis global.

"(There) isn't any question that the securities that our economy generated 2003-2007 were distributed around the world and are an important part of the problem," he said.

(Editing by James Dalgleish)