Fed official rebuts IMF warning over rate rises

A senior Federal Reserve official has played down fears of a gulf between the traders' rates outlook and expectations of the central bank's own officials, saying the market was rightly pricing in uncertainty over the pace of increases.

Dennis Lockhart, the president of the Atlanta Federal Reserve, told the Financial Times that he did not see signs of a "dangerous misalignment" in rate expectations - a view that contrasts with warnings issued by the International Monetary Fund this week.

The central banker, who votes on rates this year, said he was now more likely to back a first increase in September rather than in June, as he awaits more evidence that the economy is on track following soft numbers at the start of the year.

However he insisted that weaker economic data in the first three months of 2015 was likely to prove a temporary "aberration" - as it did last year - rather than the prelude to a more sustained slowdown.

The IMF this week warned of a potential "super taper tantrum" when traders belatedly wake up to the likelihood of the first US rate hike since 2006. Futures pricing suggests investors are expecting a markedly slower lift-off than Fed officials' own projections.

Mr Lockhart said that if market and Fed expectations were badly out of whack it would indeed be a worry. However he said the apparent gap between the so-called "dot plot" of policy makers' rate predictions and the path implied by financial contracts partly reflected the different mechanisms at work.

Fed officials' rate forecasts were a reflection of their views on the most appropriate policy stance at the end of 2015, 2016 and 2017. "That is not the same as predicting where rates are going to be," Mr Lockhart argued. "The markets are taking into consideration probabilistically a number of different scenarios and then through the activity of pricing contracts predicting where rates are going to be."

Mr Lockhart said: "I don't think we have dangerous misalignment currently. The current curve should be reflecting some uncertainty because there is uncertainty. It would be different if we were in a mode where we are saying we will raise rates 'at a steady pace'. We are not in that situation."

All but two of the members of the Federal Open Market Committee are expecting "lift-off" of official rates at some point this year.

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Mr Lockhart said that he leaned "to a later lift-off date" and that if the debate were simplified to June versus September he favoured September.

"My preference would be to wait for more confirming evidence that we are on the track we think we are on and we expect to carry us back to inflation toward target," he argued.

Weaker hiring figures from March brought the jobs market into closer alignment with growth data, suggesting the picture was overall "not quite as rosy" as previous employment reports had suggested, Mr Lockhart said.

In addition, the drop in the oil price had weighed on growth figures because of its impact on investment in the oil and gas sector, he said, while the appreciated dollar may "stick for quite some time". That said, unless there is another surge in the dollar he said he was not "overly concerned" about the prospects of further declines in core inflation.

In a speech on Thursday, Mr Lockhart set out the tests that would make him sufficiently confident that the conditions are right for the next rate rise. He said that he would ideally like to see "direct, affirmative evidence in the data" that the Fed's desired outcomes are materialising - in other words that the unemployment rate is falling and inflation is rising.

<>However he said he could get "comfortable" as long as there is at least some "indirect evidence" of continuing progress towards the Fed's objectives.

"To get to 'reasonable confidence' about inflation, sufficient evidence could show up in growth numbers, employment numbers, and rising wages as an indication of tightening conditions," he said, before adding: "A murky economic picture is not an ideal circumstance for making a major policy decision."

Mr Lockhart told the FT that his staff had still not seen "clear evidence of a tightening labour market as reflected in wages" even though he sensed this was "getting closer" amid some anecdotal evidence of tighter conditions in the southeast of the country.

"This is another reason to want to wait long enough to see some clear evidence," he said in the interview.

Mr Lockhart said that the first-quarter weakness looked overall like a "replay of 2014 where we had some factors that were truly transitory, such as weather."

As a result: "I am prepared to treat the first quarter again like last year as an aberration and not a precursor of an equivalently weak second quarter or third quarter."

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