Wednesday, 05 August, 2015
Atlanta Fed’s Lockhart: Fed Is ‘Close’ to Being Ready to Raise Short-Term Rates
Lockhart says September could be ‘appropriate time’ to lift interest rate
Updated Aug. 4, 2015 3:33 p.m. ET
Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.
“I think there is a high bar right now to not acting, speaking for myself,” Mr. Lockhart said in an exclusive interview with The Wall Street Journal.
He is among the first officials to speak publicly since the Fed’s policy meeting last week, at which the central bank dropped new hints that a rate increase is coming closer into view, a point he sought to underscore.
Mr. Lockhart is watched closely in financial markets because he tends to be a centrist among Fed officials who moves with the central bank’s consensus, unlike those who stake out harder positions for or against changing interest rates. His comments are among the clearest signals yet that Fed officials are seriously considering a rate increase in September.
“It will take a significant deterioration in the economic picture for me to be disinclined to move ahead,” he said at a conference table in a room adjacent to his Atlanta office.
His comments follow those of James Bullard, president of the St. Louis Fed, who said in an interview with The Wall Street Journal Friday, “we are in good shape” for a rate increase in September.
The Fed has held its benchmark federal-funds rate near zero since December 2008 to try to spur borrowing, spending and investment. Most central bank officials, including Chairwoman Janet Yellen, have indicated they expect to start raising the rate this year, but they haven’t decided as a group on when to start.
In weighing when to move, Mr. Lockhart said he was looking at the economy’s cumulative progress over many months, particularly on the job front.
“We’re getting positive signals from the employment numbers,” he said.
The unemployment rate fell to 5.3% in June, well below the recent high of 10% in 2009. Job gains have averaged 208,000 a month this year, compared with 260,000 a month last year.
Moreover, he added, the economy appears to have snapped back from a growth slowdown in the first quarter. “I take the second quarter to have been a nice rebound from the first quarter and my forecast for the third quarter and the fourth quarter is that they will show some improvement over the second quarter.”
Hoping to take a longer-term view of economic developments, he added that he wasn’t inclined to put too much weight on new data that emerges in the next few weeks unless it is especially weak.
“My priors going into the [September] meeting as of today are that the economy is ready and it is an appropriate time to make a change,” he said.
The main catch for the central bank, Mr. Lockhart said, is that he sees little direct evidence inflation is rising toward the Fed’s 2% target after running below it for 38 straight months.
Inflation could be held down in the weeks and months ahead because of continued downward pressure on oil prices, he said. Moreover the Fed hadn’t seen a breakout in wages it had hoped to see.
The central bank has said it will raise rates once officials become “reasonably confident” that inflation is on a path toward its goal. Mr. Lockhart said he had grown more confident inflation will pick up mainly because slack in the labor market and broader economy is diminishing.
Mr. Lockhart associated the interplay between economic slack and the inflation rate with the late economist A.W. Phillips, who put numbers to the idea that as unemployment rises or falls, wages and thus inflation move in the opposite direction.
“I think a policy maker has to act on the view that the basic relationship in the Phillips curve between inflation and employment will assert itself in a reasonable period of time as the economy tightens up, as the resource picture in the economy tightens,” Mr. Lockhart said. By that he meant that as unemployment falls further, inflation should start rising.
“I am quite confident that that basic expectation will develop or will materialize.” The logic, he added, was “compelling.”
The Fed signaled in its policy statement last week that an interest-rate increase was getting closer, Mr. Lockhart said. The statement said officials wanted to see “some further improvement” in the labor market before acting. It added the word “some” to the statement, having said in earlier statements more broadly that it wanted “further improvement.” The addition of the word “some,” he said, was “a qualifier that conveys to the public that we’re getting closer.”
The Fed has three more policy meetings this year. The next one is Sept. 16-17, followed by meetings in October and December. Many analysts expect a move in September. Investors have gone back and forth in betting on whether the first move will occur in September or December. Mr. Lockhart, like other Fed officials, said the timing of the first move isn’t so important, as long as investors understand the Fed intends to move gradually once it starts.
“I don’t think it would be a big policy error to wait somewhat longer,” he said. “I’m not one to quibble over one meeting or so. But I do think we are close. The economy is in a state of readiness for beginning normalization.”
Job gains have averaged 208,000 a month this year. An earlier version of this article incorrectly stated the figure was 200,008. (Aug. 4)
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