(RTTNews) - Policy actions from the Federal Reserve and the government should spark a positive reaction from the economy, Atlanta Federal Reserve Bank President Dennis Lockhart said Thursday. Speaking at the Birmingham Regional Chamber of Commerce in Alabama, Lockhart recognized that currently, the economy is “very weak,” although he was optimistic that the economy can begin to recover in the second half of 2009.

“I know that times are rough right now, but I believe policies in place and about to be implemented will work to restore financial stability and economic growth for the long term,” Lockhart said in prepared remarks.

Lockhart noted that he will be watching the commercial real estate sector, as well as “watching the financial conditions of emerging markets” and the “growing protectionist sentiment in this country.”

In addition, the economy faces obstacles in the credit and housing markets, adding drag to what otherwise could be a recovery. However, Lockhart emphasized that not all is lost, and that “the economic outlook is not indefinitely bad.”

“With production falling-and expected to decline significantly more this quarter-I expect some reduction of excess business inventories, putting producers in a position to expand output as spending returns,” he said.

In addition, there are signs of hope in the housing markets, as lower mortgage rates are spurring refinancing and pending sales.

Lockhart even noted positive sign in the shaky financial markets, despite the fact that the Dow continues to test its November lows.

“Indeed, we have seen modest, but hopeful, signs that financial markets are improving,” he said. “A key element in the improved economic environment expected in the latter half of the year is that financial institutions will find more stable footing and begin to provide greater support to business expansion and consumer spending.”

Policy response is likely to be successful, Lockhart said, noting the Fed’s Term Asset-Backed Securities Loan Facility (TALF)as one to address the credit crisis. The program, aimed at consumers, “could provide up to $1 trillion and should help repair securitization markets and boost credit to broad categories of consumers and small and mid-sized businesses,” he noted.

In addition, he had praise for the Treasury Department’s new plan to stabilize the banking system.

“By injecting capital into banks, I believe the U.S. Treasury has strengthened and will further strengthen bank balance sheets,” the Atlanta Fed President noted. “Under Treasury’s new plan, the government also will create a mechanism to in effect remove troubled assets from bank balance sheets, which should help rehabilitate the banking system, a sine qua non of recovery.”

The $787 billion economic recovery package signed into law by President Barack Obama is also likely to help labor markets, which in turn will boost the rest of the economy, Lockhart said.

“Rapid downstreaming of funding to state and local governments should help forestall further layoffs and furloughing of public sector employees,” he said. “Public works and other investment projects should put some of the unemployed back to work, depending on the speed of mobilization.”

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