Lockhart Urges Fed to Take ‘Cautious’ Approach to Higher Rates

Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. central bank should take a “cautious and conservative” approach as it moves toward starting to raise interest rates around the middle of this year.

“The risk manager in me will lean to preferring a later date for the first policy move to an earlier one,” Lockhart, who votes on monetary policy this year, said in the text of a speech in Atlanta today. “I supported and expect to continue to support a patient approach, one that is relatively cautious and conservative as regards the pace of normalization of rates.”

Lockhart, a consistent supporter of Fed stimulus, cited employment gains in December, which capped the best year for the labor market since 1999 as the jobless rate declined to 5.6 percent. The Fed last month said it would be “patient” in raising rates from close to zero, with Chair Janet Yellen saying an increase was unlikely before late April.

“The momentum evident in the second half of 2014 will carry over into 2015, and the ongoing outlook will remain solid,” Lockhart said. “If that is indeed the case, I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year.”

Playing down the significance of the exact timing of the first rate increase, Lockhart said it was more important that policy makers have confidence that their forecasts of inflation rising toward the Fed’s 2 percent goal were likely to be fulfilled.

Forecast Confidence

“Inflation readings and forecasts may be pivotal in deciding when to begin adjusting policy,” Lockhart said to the Rotary Club of Atlanta. “In my view, the biggest factor influencing the actual timing of a liftoff decision should be the committee’s confidence that these objectives will be achieved in an acceptable timeframe and, especially, that inflation will move at deliberate speed toward the target of 2 percent per annum.”

Even as the labor market has improved, inflation has remained below the Fed’s 2 percent target for 31 straight months. The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core figure, which strips out volatile food and energy costs, rose 1.4 percent.

Lockhart said he expects U.S. growth of about 3 percent this year, with falling oil prices benefiting the economy by aiding consumer spending, more than offsetting declining investment.

“I expect continued robust job creation accompanied by growing wages,” he said. “And, while acknowledging some room for skepticism about the inflation picture, I’m looking for inflation to rise gradually through year-end.”

“There will almost certainly be weak inflation readings early in the year influenced by energy prices,” Lockhart said. “But once that influence has passed, I expect inflation to move toward the Fed’s targeted longer-term run rate.”

Average hourly earnings for all employees dropped by 0.2 percent in December from the prior month, the biggest decline since comparable records began in 2006, Labor Department data showed. Earnings increased 1.7 percent over the 12 months ended in December, the smallest gain since October 2012.

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