Excerpts From Atlanta Fed's Lockhart Interview

By Jon Hilsenrath 

        The economy is ready for the first increase in short-term interest rates in nearly seven years and it would take a significant deterioration in upcoming data to convince him not to move in September, Federal Reserve Bank of Atlanta President Dennis Lockhart said in an exclusive interview with The Wall Street Journal.
        The comments, signaling the possibility of a rate increase nearing, sent stock prices lower and yields on U.S. Treasury notes up.
        Below are excerpts of some key passages from the interview. A fuller transcript, with additional comments on Mr. Lockhart's evolving economic forecasts, his views on froth in the commercial real estate sector and investigations into leaks at the Fed, will follow at a later date.
        WSJ: How do you see the economy progressing now relative to the thresholds you set out in an April speech?
        LOCKHART: Grounded in the dual mandate, the employment picture I would say continues to improve satisfactorily and the inflation picture obviously remains below target and affected at a headline level by continuing change in oil prices that play through to gasoline prices. I would say the inflation picture will be hard to read in the coming weeks, perhaps months. Therefore the conclusion that I will have to draw--and any individual participant on the [Federal Open Market Committee] will have to draw--in terms of being reasonably confident that inflation will converge in the medium term back to target, is going to be more of a composite of indirect evidence or indirect indicators than being satisfied with the direct evidence on inflation.
        Having said that, one of the ways I go about evaluating inflation--I obviously like everyone else look at the 12-month number. Then I look at the near-term, shorter-horizon numbers. The three-month number gives me more of a sense of a run rate, the six month number has some of those benefits as well. Some of the shorter-horizon inflation numbers in the [personal consumption expenditures[ price index seem to be firming relative to the longer horizon. I take some courage from that.
        WSJ: Courage?
        LOCKHART: I take some solace from that, some confidence from that. But I do think that inflation will be difficult to read in the near term. I'm probably going to rely as I think about the question of reasonable confidence more on a total picture and some indirect indicators.
        WSJ: In April you talked about wanting to see no regression in the economy.
        LOCKHART: I'm not seeing any significant indication that we are losing ground or that we are in some way falling off the basic track that I have been describing for quite some time. In that sense I think the economy is performing at a quite satisfactory level.
        WSJ: And so we are this kind of fuzzy middle for you.
        LOCKHART: We are in a fuzzy middle if you want to use that term, because there has not been a clear breakout of wage acceleration; there has not been a lot of clarity around the inflation forecast; and growth is in the moderate range of 2% to 2.5% or 2.75%, but not right up against the 3% we were hoping would be the case in 2015.
        WSJ: Where do indirect indicators lead you at this point in terms of your confidence level on inflation and the progress you're seeing on jobs?
        LOCKHART: We're getting positive signals from the employment numbers. The second-quarter growth numbers, 2.3%, very close to what we here had forecast using our tracking estimate. Certainly I take that as a rebound from the weaker first quarter. The first quarter was stronger than we had previously thought. The first estimate was contraction; then it was revised to slight contraction and now it is revised to slight growth. But I take the second quarter to have been a nice rebound from the first quarter and my forecast for the third quarter and the fourth quarter is that they will show some improvement over the second quarter. I think that is a solid middle-range growth picture.
        One of the key points I think is that in the absence of direct evidence that inflation is in fact converging to the target and in the absence of compelling or convincing direct evidence, I think a policy maker has to act on the view that the basic relationship in the Phillips curve between inflation and employment will assert itself in a reasonable period of time as the economy tightens up, as the resource picture in the economy tightens.
        WSJ: How comfortable are you doing that?
        LOCKHART: I am quite confident that that basic expectation will materialize.
        WSJ: You talked about wages a moment ago. We just got a really soft employment cost index number. What do you make of that?
        LOCKHART: The analysis I've seen is that the first quarter, which to some extent was interpreted early on as evidence of acceleration, really now appears to have been influenced by incentive compensation-type job categories and that the great majority of other vocations and other forms of employment were relatively flat and then the weakness in the second quarter certainly doesn't point to any evidence that we're seeing the long-hoped-for acceleration. I have to conclude that the wage picture is mixed and that we have not yet seen the acceleration that we had hoped for and expected.
        WSJ: So this decision really comes down to your confidence in a model that Philips curve dynamics will assert themselves?
        LOCKHART: Let me turn your question around a little bit. I think there are going to be two principal considerations on the mind of policy makers and then I will tell you where I come out on that at this point. One is going to be the question of inflation. How do you get to an honest view of being reasonably confident? That is going to be one key thing that this policy maker has to struggle with. The second issue is to what extent is one going to be influenced by very near-term data. That data could be quite positive and therefore encouraging, or the data could be mixed or perhaps even some really disappointing numbers could come in. Those I think are what most policy makers, my colleagues, will be evaluating.
        My own approach to that is to say is I think we have to put significant weight on the accumulated progress we have seen quite literally over a number of years, but certainly since the first of the year, and not be overly influenced by the gyrations that so often occur in month-to-month data. That is not to say that you ignore the evidence that is most proximate to the date of having to make a decision, but I won't be overly influenced by just the latest thing I've heard on the economy. I do think this is a time to try to take a pretty broad perspective, a pretty long horizon perspective to where the economy is relative to where it was and whether a policy rate at zero continues to be appropriate for the circumstances.
        We have talked already for a bit about getting to reasonable confidence. It is going to be a synthesis of a variety of things. I don't know if I would quite say that I am resting everything on a model, but I am certainly prepared to get comfortable based on expectation that seems to me to have compelling logic.
        WSJ: Given the cumulative evidence that you've seen, do you think you'll be ready to move in September?
        LOCKHART: I want to sort of hold off on that. I have said publicly before that I lean toward September and I am still very open to a September move.
        WSJ: What does it come down to for you? Given that you are focused on cumulative evidence and don't want to put too much weight on the last month of data. What are you going to be assessing over the next two months to make up your mind?
        LOCKHART: This touches on what we talked about earlier when we talked about the April speech. One framework that I will be using will be looking for any indication in the economic data that undermines my basic belief about the track of the economy. If you want to call that negative evidence or evidence that casts doubt I will be looking closely at all evidence that we see in the data for indications that my basic assumptions are wrong or should be doubted. That is like a negative test in some ways. That is going to be one of the principal ways I will go about judging the question of whether liftoff in September is appropriate or not. To interpret that, that means I think there is a high bar right now to not acting, speaking for myself. It will take a significant deterioration in the economic picture for me to be disinclined to move ahead.
        WSJ: Why do you think that will be the time. Why do you think have we gotten to a point where you are ready to take this historic step?
        LOCKHART: I am of the belief that if we were to roll the film forward and then look back one quarter or one meeting here or there isn't going to make a significant difference to the economy. I don't think it would be a big policy error to wait somewhat longer. I'm not one to quibble over one meeting or so. But I do think we are close. The economy is in a state of readiness for beginning normalization. I do want to emphasize, what you have heard from many people, including Chair Yellen, that the process of interest rate normalization is going to be a gradual process so we will continue to have quite accommodative policy for quite some time. I add all that up and say, you know, my priors going into the meeting as of today are that the economy is ready and it is an appropriate time to make a change.
        WSJ: Some people have raised the idea maybe you signal it in September and then wait until October to act. Do you want to get into this pattern of signaling, waiting and then moving?
        (MORE TO FOLLOW) Dow Jones Newswires

        August 04, 2015 18:36 ET (22:36 GMT)

        LOCKHART: I am one who very strongly would like to avoid unnecessary market volatility around the announcement of liftoff. But we have put a stake on the grounds that we are going to make a decision based on the data. It is data-dependent. That makes it much more difficult to signal because that suggests that the data, right up to the meeting, all is taken into consideration. That makes it difficult to make a decision a meeting in advance and then somehow signal it. You can make small gestures of signal. I would say that the inclusion of the word "some" in our statement is that kind of small indication of leaning in a particular direction without completely signaling certitude or eliminating any optionality.
        WSJ: Tell me about that word "some." Did you all spend a lot of time talking about that four-letter word?
        LOCKHART: Some time. Since it was a change from the previous statement there had to be discussion of whether people wanted it in or didn't want it in. There was some time devoted to discussing it. I interpreted it as meaning a bit more or a little bit more. That is a qualifier that conveys to the public that we're getting closer.
        Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
        (END) Dow Jones Newswires

        August 04, 2015 18:36 ET (22:36 GMT)

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