Fed's Lockhart: Losing sleep on commercial property

ORLANDO (Reuters) - U.S. commercial real estate problems could derail the country’s economic recovery later this year, a top Federal Reserve official said on Monday.

“Many banks are pretty heavily exposed to commercial real estate. It is also a big part of the securitization market. So commercial real estate is one that concerns me,” said Federal Reserve Bank of Atlanta President Dennis Lockhart.

Lockhart, a voting member of the Fed’s policy-setting committee this year, said that around $400 billion of commercial real estate refinancing was hanging over the market and he was monitoring its progress with care.

“If you think of 2007 and 2008, in a negative sense, as the year of...residential real estate issues, it is possible to think of 2009 as the year of commercial real estate. That is the one domestic factor that keeps me up at night,” he told the Association for Financial Professionals after a speech.

Lockhart said bold action by U.S. officials should restore growth in the second half of 2009, and he emphasized this meant that Fed rates would be hiked at some stage from their current near-zero levels to keep inflation at bay.

“We see very little risk of hyper-inflation, or serious inflation, in the short term. If anything, we’re somewhat more concerned about the opposite,” Lockhart told a questioner.

“One of the requirements of the future, conceivably, as the economy recovers, will be the return to more conventional policy and shrinking of the Fed’s balance sheet (and), conceivably, rate rises. You have to time that appropriately to ensure that we don’t have a long-term inflation,” Lockhart said.

In his prepared remarks, Lockhart stressed that the U.S. central bank had undertaken to use all the tools at its disposal to aid the economy, and he endorsed government action to boost bank balance sheets.

“By injecting capital into banks, I believe the U.S. Treasury has strengthened and will further strengthen bank balance sheets,”

The Treasury has already injected more than $200 billion into banks and was joined by the Fed and other agencies on Monday in a fresh assurance that the government would provide more capital as needed to keep large financial institutions viable.

In one brighter note, Lockhart said it was very hard to gauge the start and end of recessions, and cautioned there was a tendency to be too gloomy in predicting a recovery.

“Economic forecasts will tend to be overly optimistic as the economy goes into a recession, but overly pessimistic as the economy comes out of recession and begins its expansion phase. Perhaps we should take some comfort from that,” he said.

But he warned there were significant risks to his outlook from a chilled international growth climate, in addition to the weakened state of the domestic housing and bank sectors.

“I’m also playing close attention to the trajectory of Japan. Last quarter the Japanese economy contracted by 13 percent and deflationary pressures have accelerated,” he said.

Asked after the speech if he was confident that China would be able to boost domestic demand speedily, Lockhart made plain that he was not holding his breath for quick results from stimulus measures announced by Beijing.

“Whether that is going to be possible in the short-term is a very debatable question. Because shifting from a high savings, low consumption society to a lower savings, higher consumption society in a short period of time can’t easily be done,” he said.

Reporting by Alister Bull, Editing by Andrea Ricci