* Recovery still getting its legs, Atlanta Fed chief says
* Gas prices, cost pressures merit watchful eye
* Low-rate policy benefits seen outweighing costs (Adds quotes)
By Karen Jacobs
ATLANTA, March 1 (Reuters) - The U.S. economy is gaining strength as evidenced by lower unemployment and other positive recent economic data, but it remains far from its ‘optimal condition,’ Atlanta Federal Reserve President Dennis Lockhart said on Thursday.
Lockhart, a voting member of the U.S. central bank’s Federal Open Market Committee this year, also said he still favors low-rate monetary policy even though at present low rates aren’t stimulating much credit growth.
“Given the circumstances of the economy, which I described earlier as still striving to get its legs, I continue to think the benefits of low-rate policy outweigh the risks,” Lockhart told a banking industry conference hosted by the Atlanta Fed.
He said caution prompted by uncertainty - particularly uncertainty over the outcome of the U.S. presidential election in November - continued to be a drag on the U.S. economy.
He noted a mix of good and negative in the economy. While jobs are being created, there are still significant levels of underused resources. The housing market is seeing improving sales but home prices are still declining, Lockhart added.
Although he said inflation expectations appeared stable, Lockhart cautioned that rising gasoline prices and cost pressures “warrant a watchful eye for any shift in the underlying overall inflation trend.”
He said after his speech that gasoline prices at $4 a gallon has historically caused concern, as prices at that level pressure the income and discretionary spending of many U.S. families. Still, he added that gasoline prices would need to increase more before he would consider altering his view, reiterated on Thursday, calling for economic growth of 2.5 percent to 3 percent for 2012.
“As regards (gas prices) really having an effect that would reverse the momemtum that we see in terms of growth, I think it would have to be materially above the $4 level before I would begin to rethink what I would view as the full year likely growth outcome,” Lockhart said.
He also said a move toward deflation could be one factor that signals further monetary stimulus would be needed.
“The onset of recessionary conditions and movement in the direction of deflation would certainly be a set of conditions in which I think we’d have to consider further balance-sheet kind of stimulus,” Lockhart said.
He said he would need more evidence that the economy was resilient before he became more bullish. He said it looks as if the current first quarter would be softer than the fourth quarter of 2011, and noted a number of risks including the sovereign debt crisis in Europe.
“I would feel more comfortable if I saw a sustained record of growth, a continuing decline in unemployment and simply the absence of external risks materializing and get a more cumulative sense that there’s a resilience in the economy,” Lockhart said. “I‘m not yet there to see that resilience.” (Reporting by Karen Jacobs; Editing by Chizu Nomiyama)