Fed’s Lockhart Says He Wants Rising Inflation Before Liftoff

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Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy weakened in the first quarter and he wants to see both falling unemployment and rising inflation prior to the central bank’s first rate increase.

“A murky economic picture is not an ideal circumstance for making a major policy decision,” Lockhart said on Thursday in West Palm Beach, Florida. “Falling unemployment and rising inflation may be unlikely in the very near term. In my working forecast, inflation does not pick up until the second half of the year.”

The Federal Open Market Committee was split at its meeting last month on when to begin raising rates from near zero. Several participants wanted to start raising rates in June, while others favored later in the year, according to minutes of the March 17-18 meeting. That was before a report showed employers added fewer jobs than forecast in March.

“Ideally, I’d like to see direct, affirmative evidence in the data that the desired outcomes are in fact materializing,” Lockhart, who is a voting member of the FOMC this year, said to Palm Beach-area business people. “This test would call for a falling unemployment rate and rising inflation.”

A majority of economists in an April 3-9 Bloomberg survey forecast the first rate rise at the Fed’s September meeting. In two surveys conducted in March, a plurality of economists said the first increase would come at the Fed’s June meeting.

“I think waiting a while longer improves the chances of seeing confirmation from incoming data that the economy is on the desired path,” Lockhart said.

Soft Patch

Tracking forecasts judge the U.S. economy expanded at about a 1 percent annual rate in the past quarter, and the Atlanta Fed’s estimate is well under that, Lockhart said. While unsually harsh winter weather was one reason, a strong U.S. dollar has hurt net exports and falling oil prices have lowered capital spending, he said.

“Consumer spending in the first quarter was not as strong as expected,” Lockhart said. Manufacturing “has felt the pressure. Manufacturing growth numbers have softened considerably relative to a year ago.”

Even so, Lockhart said he expects growth in the remainder of the year to return to a pace of 2.5 percent to 3 percent, with consumer spending aided by lower oil prices.

In March, the FOMC dropped a pledge to be “patient” as it considered the first rate rise since 2006, while also reducing forecasts for the path of increases. Fed Chair Janet Yellen has since said borrowing costs would probably be raised gradually, and a weak payrolls report has added to caution among officials.

“The report for March brought the employment picture down to earth,” Lockhart said.

Payrolls climbed by 126,000 in March, falling well short of expectations and breaking a yearlong string of monthly gains exceeding 200,000, a Labor Department report on April 3 showed.

Prices as measured by the Fed’s preferred gauge rose just 0.3 percent in February from a year earlier, and inflation has languished below the central bank’s 2 percent goal for 34 straight months.

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