Economic recovery has been uneven and while it was initially boosted by inventory rebuilding, last summer it weakened, slowing "markedly," said Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta. But there are still pockets of strength in the economy, he said, speaking to the Lafayette Chamber of Commerce in Lafayette, La. "While the risks have increased, I do not expect a recession."

Focusing on deleveraging in the economy, Lockhart said the process of debt reduction by households and businesses is a major structural adjustment and will take many years to play out. "Debt is not in and of itself a bad thing," he said, because it supports economic growth by allowing households, businesses and governments to smooth their spending and investment over time. "Borrowing and lending can help facilitate the allocation of capital to productive uses in the economy."

Much of the growth in debt over the last decade was facilitated by rising home prices, but declining values along with rising unemployment set in motion "a process of deleveraging by the household sector."

Debt in the nonfinancial business sector also increased over the last decade, reaching a historic high of 79% of gross domestic product in 2009.

From its peak in 2009, total household debt has declined to around 90% of GDP, the lowest level since 2005, and the household savings rate has risen to about 5%, he pointed out. By the first quarter of 2011 nonfinancial business debt had declined to about 73% of GDP.

That said, for the economy as a whole, debt relative to GDP has barely changed.

"There is sufficient strength in the economy," he added, noting he is comfortable with the current stance of the Federal Reserve's accommodative monetary policy.

Even so, monetary policy should not be seen as a "panacea" and policy adjustments are required as economic circumstances evolve, Lockhart said.

"We must continue to help the economy achieve a healthy enough cyclical recovery, especially with unemployment high and consumer spending lackluster," Lockhart added. "At the same time, we must recognize the longer-term need for directionally opposite structural adjustments, including deleveraging."

The U.S. has an ongoing jobs crisis, with persistently high unemployment and large numbers of people leaving the workforce. But highlighting unemployment as an indicator that the Federal Reserve should control is a move that should be approached carefully, Lockart said. "Singling out employment moves the Fed more in the direction of targeting employment levels," he said. "Even though it's part of our dual mandate I'm not sure we can control it all that well."

Lockhart added that "my initial reaction is cautious."

The Fed has said it will keep rates low at least until mid-2013. Lockhart said that he didn't rule out keeping them low for longer if economic conditions warrant it--or reversing the policy if there's a sudden explosion of growth.

"But if we are in a long-term struggle, I cannot rule out that it might be longer," he said. The Fed's clearly stated low interest rate policy should give businesses currently withholding investments some certainty to plan spending, he added.

Low interest rates and ample liquidity help to encourage spending by consumers and businesses. Since this is an aim of policy in the near term, Fed economists also watch the monthly data on consumption and surveys of consumer confidence like those in the private sector, he said. "There's broad acknowledgment that policy must support the long-term rebalancing required to sustain our economic health."

Lockhart said he is "comfortable" with the current stance of policy even though given the weak economic data and considering the rising concern about chronic slow growth, "I don't think any policy option can be ruled out at the moment."

Lockhart added that another round of quantitative easing, following the two previous rounds engaged in by the Fed, can't be discarded. "I think the prospect of using that tool again is most tied to the onset of a clear recession accompanied by deflationary pressures," he said. As a matter of fact, the Fed should hold onto that card to be played at a time when price indicators point to deflation, Lockhart added.

Critics have said that the previous rounds of easing helped contribute to inflationary pressure. While Lockhart acknowledged there was pressure at some point, in part related to commodity prices, the current measurement of inflation is "within an acceptable range."

Another element in the Fed's toolbox is "operation twist," in which it would stimulate the economy by buying long-term Treasurys using proceeds from short-term bonds. "I wouldn't rule it out at all," Lockhart said.

In the meantime, however, the Fed should let economic activity unfold and take a close look at data before resorting to any measures, he added. "At the moment I'm comfortable where we are," he said. "I'd like to see the economy evolve a bit further."

Lockhart added that Europe's struggle with debt should not have a large impact on the U.S. economy, although indirect effects are possible. "Exposure to the European situation is contained," he said.

Advanced countries, including those in North America, Europe and Japan, are facing slow growth and "serious" fiscal challenges, Lockhart said. But the developing world, led by India, China and Brazil, is showing strength, he added.

-By Anusha Shrivastava and Angel Gonzalez, Dow Jones Newswires; 281-536-3064;angel.gonzalez@dowjones.com