Nov. 10 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy will probably recover slowly from the deepest recession since the 1930s because of rising bank losses, especially in commercial real estate.

“Now that growth has resumed, the overall objective of economic policy should be to bring about a durable recovery and an environment that reduces unemployment as quickly as possible while containing inflationary pressures,” Lockhart said today in a speech in Atlanta. “The process of achieving this objective will necessarily involve judicious removal of government supports and the normalization of monetary policy.”

Policy makers have expressed concern that rising commercial real estate loan defaults could pose a risk to U.S. banks and hinder a recovery. All 12 Fed district banks reported a weak or declining commercial real estate market, the central bank said Oct. 21 in its Beige Book business survey.

Defaults on commercial real estate loans totaled $110 billion, or 6 percent of all such loans, in the second quarter. Banks worldwide have recorded more than $1.6 trillion in losses and writedowns since the start of 2007, data compiled by Bloomberg show.

While commercial real estate “is very worrisome for parts of the banking industry, I don’t see it posing a broad risk to the financial system,” Lockhart said in remarks prepared for a conference sponsored by the Urban Land Institute.

“Nonetheless, CRE could be a factor that suppresses the pace of recovery,” he said. “As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view.”

Tighter Standards

The central bank said yesterday fewer banks tightened lending standards for companies and consumers in the third quarter than in the prior period as the U.S. economy grew for the first time in more than a year.

Last month, the Fed and other regulators urged commercial real estate lenders to “work constructively” to arrange modifications with borrowers who show a willingness to repay debt.

“Because employment growth tends to lag recovery from a recession and because of factors such as small-business credit constraints, my current outlook for employment is one of very slow net job gains once the trend reverses, in all likelihood sometime next year,” Lockhart said. “If this view is correct, this job growth outlook doesn’t help the commercial real estate situation.”

Stable Expectations

The Fed last week reiterated that it plans to keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

“My baseline forecast is for a relatively subdued pace of growth beyond the current quarter and through the medium term,” Lockhart said. “The potential sluggishness of the recovery partly reflects certain unique characteristics of this recession,” including continued weaknesses among banks.

The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October as employers cut more jobs than forecast, the government reported last week. The rate may rise to a post-World War II high of 13 percent in the aftermath of the recession, David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said Nov. 9.

In the third quarter, gross domestic product expanded at a 3.5 percent annual rate after a yearlong contraction, Commerce Department figures showed Oct. 29. Household purchases increased 3.4 percent, the most in two years.

Lockhart is a former Georgetown University professor who spent much of his career with Citibank and Citicorp, now Citigroup Inc. His district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi and Tennessee.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

Last Updated: November 10, 2009 09:15 EST