Fed’s Lockhart Still Favors Mid-2015 for First Fed Rate Increase – Real Time Economics

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, at the sixth annual Rocky Mountain Economic Summit in Jackson, Wyoming, in July.
Bloomberg News

In a speech brimming with optimism about the economic outlook, Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday he’s sticking with his long-held view that the U.S. central bank should hold off on raising rates until the middle of next year or later.

“The momentum I perceive in the economy gives me confidence that the Federal Open Market Committee can consider beginning to normalize interest rates in 2015,” Mr. Lockhart told a local group here. What the Fed does with short-term rates will be driven by how the economy performs, but he added “my publicly stated projection of liftoff is mid-year or later.”

Mr. Lockhart, who doesn’t currently hold a voting role on the interest rate-setting FOMC, has been arguing for some time in favor of taking a patient view on boosting rates off their current near-zero levels in order to ensure that the growth that’s been seen recently endures. He will have a vote on the FOMC next year.

Broad-based improvements in hiring and steady economic growth have heated up the debate over the timing of interest rate increases, although most key officials have argued in favor of holding off on rate increases until at least the middle of next year.

Mr. Lockhart is widely looked to as a centrist on the FOMC and a bellwether of policy makers’ consensus outlook. His comments Monday reaffirm higher borrowing costs still lie some distance in the future, even as some regional Fed officials agitate for an earlier course of rate rises.

Mr. Lockhart told reporters after his speech that he’s also comfortable with the Fed continuing to state in its official policy statement that interest rates will remain very low for a “considerable time” to come. Some officials want those words removed to give the Fed more latitude to react to the economy.

“I’m not in a rush to drop the ‘considerable time’ phrase if it would in any way convey an imminent liftoff decision,” Mr. Lockhart said. “For my purposes, I’m not in a rush to drop it” right now, he added.
In his formal remarks, Mr. Lockhart said raising rates too soon could create big problems, noting “there would be real costs associated with an irresolute path of policy.”

“Reversing a start to interest-rate normalization, and subsequently having to go back to the quantitative-easing well, would erode Fed credibility and confidence in the economy for the longer-term,” he said. Mr. Lockhart was referring to the recently ended bond-buying that the Fed had engaged in to provide additional stimulus to the economy when short-term rates could be lowered no further.

In his speech, Mr. Lockhart was decidedly upbeat about growth and hiring gains while being concerned about inflation, which continues to fall well short of the Fed’s 2% price target. He said he expects to see 3% growth through 2015, with average monthly job gains of 200,000 or more and an unemployment rate that will likely fall from the current 5.8% reading to between 5.25% and 5.5% by the end of 2015.

Given what has happened and what will likely happen with growth and hiring, he said, current inflation dynamics are “somewhat puzzling.” What’s driving inflation right now is somewhat ambiguous, he said.

Mr. Lockhart expects inflation to rise, though. He said it will be critically important to watch what happens with labor market compensation. Stuck since 2009 at annual gains of around 2%, improvement there would signal the jobs market is around its full employment levels, which should also help push inflation back to desired levels, he said.

He told reporters that if inflation didn’t rise by next summer, the Fed would have to think very hard about what to do.

“Inflation is the one key element that doesn’t seem to be consistent with what we are seeing in terms of growth and for that matter what we are seeing in the labor market,” he said. If inflation doesn’t rise from current levels by summer, Mr. Lockhart said “if I’m going to stay true to data dependency, I’d have to consider at that time the options, and therefore I don’t think liftoff can be taken under those circumstances as carved in stone.”

Mr. Lockhart said in his speech that a key risk to the outlook is the state of the global economy.

“The external environment seems somewhat precarious, which raises concerns of spillover to our economy and financial markets,” he said.

Mr. Lockhart also told reporters after his speech he’s not worried about the current state of financial markets. Some have worried the Fed’s ultra-easy monetary policy stance is distorting asset values.

When it comes to the financial sector, he said, “I am comfortable with the current picture. I don’t think we are taking on excessive risk. I’d called it modest risk.”



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8 December 2014 | 5:40 pm – Source: blogs.wsj.com


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