Fed’s Lockhart Says Rate Increase Likely Mid- to Later 2015

Federal Reserve Bank of Atlanta President Dennis Lockhart said an improving labor market and rising inflation are likely to create conditions for an initial interest-rate increase in the middle of 2015 or later in the year.

“I continue to expect conditions for liftoff to ripen by the middle of 2015 or a bit later,” Lockhart said today in a speech in Jackson, Mississippi.

The Federal Open Market Committee said last week it will reduce monthly bond purchases by another $10 billion, to $15 billion, and retained its pledge to keep the benchmark interest rate near zero for a “considerable time” after purchases end next month.

Lockhart said he expects growth of about 3 percent in the second half of this year and next year, with inflation “to firm up gradually” to the Fed’s goal of 2 percent.

Raising interest rates as early as the first quarter would amount to “rushing to a judgment” when more time is needed to show the economy is on a 3 percent growth track, Lockhart told reporters after his speech. “I am really looking for some time to pass that accumulates evidence we are on this solid track.”

Risks to this outlook include the housing market, and the strength of the U.S. currency.

Dollar’s Appreciation

“The recent appreciation of the dollar may dampen export activity in coming months,” he said.

Lockhart told reporters after his speech “I think there is a reasonable chance the dollar holds” at current levels or “even could conceivably go higher.” That could make international sales of “some of our particularly big-ticket capital-expenditure products somewhat less competitive.”

The Bloomberg Dollar Spot Index, which charts the dollar again 10 major rivals, has climbed for a fifth day and is at its highest level since mid-2010.

While risks around his outlook generally are “reasonably balanced,” Lockhart said in his speech he was more worried about a period of too-low inflation.

“ At this juncture, I’m more concerned about a persistent undershoot,” he told the Mississippi Council on Economic Education.

Pricing Power

Inflation expectations are “firmly anchored” and businesses don’t have pricing power. In addition, there continues to be slack in the labor market and wage growth has been “quite slow,” he said.

Lockhart, who is not a voting member of the FOMC this year, said he supported last week’s statement. Dallas Fed President Richard Fisher and Philadelphia Fed chief Charles Plosser both dissented last week.

Some adjustment in the language will be needed with the end of asset purchases, Lockhart told reporters.

“That doesn’t mean necessarily use of the phrase ‘considerable time’ will be dropped,” he said. “Whether we like it or not, any change in language will be viewed as a signal” so policy makers need to be careful.

“All things considered, I am comfortable using the ‘considerable time’ device a bit longer,” he said.

Calls for new guidance have come from those who want to keep rates low for longer, such as Boston Fed President Eric Rosengren, as well as those, including Plosser, who prefer to raise them sooner.

Another potential risk Lockhart discussed was financial instability stemming from excessive risk-taking by investors, but Lockhart said the banking system had been strengthened by higher capital levels since the crisis.

“I am comfortable that being patient regarding liftoff until the middle of next year or perhaps a little later will not bring on a systemic financial event,” he said.

Lockhart has led the Atlanta Fed since 2007. His district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi and Tennessee.

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