Interview: Lockhart on Fed rate expectiations

Δημοσιεύθηκε: 16 Απριλίου 2015 - 19:12

The following is an edited transcript of an interview of Dennis Lockhart, president of the Atlanta Federal Reserve, by Sam Fleming of the Financial Times, on Monday April 13.

How much weight should we be putting on the soft Q1 data?

To a degree, this is a replay of 2014 where we had some factors that were truly transitory, such as weather. Weather effects are unlikely to repeat themselves in the spring relative to the winter. There are other factors that are more novel this year - the appreciated dollar and the drop in oil prices. The appreciated dollar may stick for quite some time. That, in and of itself, is not transitory, but it required a rapid adjustment in the economy and some of that adjustment probably weighed on growth. Regarding the drop in oil prices, we very clearly can measure that some of the investment activity in the oil and gas sector has been affected and has weighed on the growth numbers. 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. I don't think that is going to happen.

Is the soft payroll number we saw the same story?

It is one month. It is subject to revisions. And fluctuations are going to occur in all series. Having said that, what was developing was a disconnect between the payroll jobs numbers and the underlying growth story, and, although I am not happy with the underlying growth story in the first quarter, at least these two metrics now seem to be consistent with each other. It is noteworthy that the previous two months were revised down. Maybe we were looking at not quite as rosy a picture.

Does it put a pickup in core inflation off further?

Unless we see much further dollar appreciation I am not overly concerned about a deteriorating core inflation picture . . . I think whatever broad disinflationary effect we may have seen coming from energy prices likewise will have probably mostly played through by now. Therefore I am not too concerned that we are going to see further softening in core inflation.

That nudges you at least until September - or later?

I lean to a later lift-off date. To the extent you want to simplify that debate to June versus September, I lean to September. I don't think, given the progress we have made, the state of the economy, and my confidence that the first quarter was an aberration, that it would be horribly damaging to go a little earlier versus later. But 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.

What is the impact of wage numbers?

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We have heard anecdotal evidence from contacts mostly in the southeast of tightening labour markets. But those anecdotes have not translated into indications in the data that are more broad based. We have not yet seen clear evidence of a tightening labour market as reflected in wages. I do sense we are getting closer, however, and this is another reason to want to wait long enough to see some clear evidence. We, the committee, may come to a conclusion in anticipation before we see wage pressures broadly manifested in wage inflation - that may be the case. I am of the school that there is still not insignificant slack in the labour markets. I focus on part time for economic reasons as an indicator that there is a lot of room to absorb labour resources . . . It influences my thinking that we still have 6.8m, 6.9m people who claim they are involuntarily working part time.

The markets and the Fed are out of sync - is that a worry?

If there is a big misalignment. It could risk some undesirable volatility at a time of policy change or the signalling of policy change. I don't ignore that at all. What is taken as misalignment is to some degree a difference in the exercises that the two parties are involved in. Those of us in the Fed are placing our dots for year-end interest rates as an answer to the question: What do you think is appropriate policy? That is not the same as predicting where rates are going to be. 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. The exercises are not exactly the same. 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.

There is a lot of confusion about why there is an aversion on the FOMC to having a large overnight reverse repo facility; what is the particular concern about having that over a longer period of time?

<>The minutes make reference to a temporarily liberal cap or no cap on the RRP facility, and we have communicated in the January normalisation principles a desire to use the RRP facility only as long as necessary, to phase it out when we feel we can do that. My personal concern is that this will be a new tool that could, if permanent or if longstanding, become a riskless asset refuge that could exacerbate a distressed financial stability situation by its very existence. [In other words] a flight away from particular money-market funds and other players in the short term money markets. I don't think we want to be in the situation of encouraging that flight activity in a period of financial stability problems.

The judgment would be the risks of contributing to unstable financial markets against the value you are getting from the facility in achieving your objectives for short-term interest rates. That trade-off would have to be evaluated at any given time. In the absence of financial stability concerns, it should stay in place as long as necessary to ensure that the policy rate was executed as desired. I am one who believes once we start out on the process we will be raising the IOER, and that much will follow from that decision. The trading range for the fed funds rate will hew closely to the ceiling that the IOER rate constitutes. Trading within the range will move around but will be acceptable and will not be chronically at the bottom of the fed funds rate. I have confidence this will work and the overnight reverse repo will not be required for a long period of time.

Is there any argument for sales of short-term assets to maintain this range?

I don't expect we are going to need to. I am holding to the view that shrinking the balance sheet will be extremely gradual almost entirely based on maturing assets or run-off. I don't dismiss completely the possibility that we may want to look at selling assets at some stage. I am not one who is dead set against that idea. I just don't think it is going to be necessary.

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