In an interview with Bloomberg’s Kathleen Hays, The Federal Reserve of Atlanta President/CEO Dennis Lockhart warned of the risk of “moving prematurely and snuffing out some progress” if first interest rate increase comes a little big sooner. Lockhart said “I’m more in the camp that patience is called for. I’m holding to the view that mid-year 2015 is probably about the right time for the beginning of a cycle of tightening…I think the conclusions about the strength of the economy at this point have to be taken as tentative conclusions. I’d like to see a bit more evidence accumulate.”

Dennis Lockhart

Lockhart went on to say, “it’s very important that we have high confidence that the progress that we expect will be made over the next several months is going to continue.  So I’m trying to build up a sense of confidence in the forecast from the point at which we would begin to adjust forward guidance and then ultimately from the point of liftoff. The forecast from that point is very important.  Liftoff in all likelihood is going to occur well before we actually achieved full employment and probably, you know, less than total certainty on long-term inflation, just because of the span of time. So I want to be confident that the economy’s going to continue on that track.”

To listen to the interview:

Lockhart: Mid 2015 Right Rime For Tightening – Full transcript

KATHLEEN HAYS:  The latest minutes from the Fed, the FOMC, are out.  And it’s an interesting backdrop to me for the conference and discussions here because we know there’s been a big focus on the labor market, unemployment and normalization.

And what we see in the minutes, it seems that this discussion has really intensified.  There’s some people getting a little concerned about the forward guidance.  There’s, what, many people wondering if maybe the first interest rate increase has to come a little bit sooner.

Where are you on this?

DENNIS LOCKHART, CEO AND PRESIDENT, FEDERAL RESERVE BANK OF ATLANTA:  Where am I?  Well, I’m more in the camp that patience is called for.  I’m holding to the view that mid-year 2015 is probably about the right time for the beginning of a cycle of tightening.  By that time, if all goes well, the economy will have made progress from where we are today and with a forecast of reasonably high confidence, look — will look like we’re going to achieve our objectives and so I’m not one who is — how should I put it — in a rush to really lift off soon.

I think the conclusions about the strength of the economy at this point have to be taken as tentative conclusions.  I’d like to see a bit more evidence accumulate.  So I’m still one of those who’s thinking in terms of the middle of next year.

I should emphasize that, of course, this is going to be based on the performance of the economy.  It’s data dependent.  It’s going to be a judgment that the committee makes, based on how things play out between now and year-end or early next year or even later.

So you know, it could be faster; it’s conceivable.  And therefore I might have to pull forward the date that I’m — have in mind.

But it also could conceivably be put off if things go badly.  So that’s the way I’m looking at it.  I’m still mid-2015.

HAYS:  Would you say it’s asymmetric at this point, though, that the — you and others are seeing, hmm, you know, the economy has improved.  It continues to improve.  We’re data dependent.

But it’s more of a question of not being so worried about the economy slowing down but just waiting to see how much it speeds up or how much is recovery gains momentum.

LOCKHART:  Well, it’s asymmetric in the sense that if people were sort of to handicap around midyear, whether it’s possible that liftoff would  come earlier or later, I think, that probably more people — including more of my colleagues — thinking it’s possible early.

So in that sense it’s asymmetric.

But I think we’re in a process of validating some assumptions and so far they seem to be playing out.

One key assumption is that after a really bad first quarter of the year and a second quarter that had some component of rebound from the first quarter, that we are on a track of round numbers 3 percent growth.  With all of the gains in employment and, for that matter, in prices that we would expect from that pace of growth, I think it’s still a little early to call that.

But the evidence certainly so far has been encouraging.

HAYS:  Would it be fair, though, to look at those minutes and say there has been, even a subtle shift on the FOMC, that there is this sense that more people are at least wondering, just wondering if maybe that — if the — that time has to shift forward a bit?

LOCKHART:  I think that’s a fair assessment.  Certainly there — I have colleagues who are either calling for an earlier notion of when liftoff would take place or are at least leaning more in that direction.

HAYS:  Forward guidance:  considerable period of time, apparently the minutes show a very — a very intense debate over that as well.

And obviously we know that one of your colleagues out and out dissented because he said it doesn’t reflect where the — where the — where the committee is now.

Is there any merit to that?

LOCKHART:  I think the guidance — and, of course, it’s considerable period of time after the ending of tapering — I think there is a mix of views on that.  My own view is that the terminology or the words are still appropriate.  And may very well be appropriate through the fall, depending on how the data come in.

So I’m not necessarily personally one who’s calling for change.  But clearly there are others who think that that guidance is — has sort of done its work and played its role.  And it’s time to adjust guidance.

HAYS:  Are you concerned the markets are watching the Fed so closely now that it — it’s difficult, almost not possible for the Fed to begin to start moving rates higher without an outsized market reaction, particularly — well, bonds, stocks, you name it.

LOCKHART:  Well, I think that’s  a question of how effective our communication is, once there is a consensus obviously about what has to be communicated.  And to what extent to this — to participants in the market understand what we’re saying and build their own positions around an anticipation that that’s the way things are going to play out.

Recently I looked at some information, both forward rates that — for both Fed funds and euro dollars and then looked at a — more of a consensus of forecasters of private sector forecasters.

There is some divergence between the rate path that the forecasters in their most recent survey had indicated and what the markets seem to have priced in.  You know, my hope would be that there’s a lot of consistency between what markets are pricing in, what forecasters are expected and

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