Dennis Lockhart joined the Federal Reserve in 2007, a key turning point in U.S. monetary policy when the Great Financial Crisis was just about to begin. He stayed through 2017, working alongside then-Fed governor Jay Powell who took over as Chair just before Dennis returned to the private sector where he is, among many other roles, now teaching diplomacy as the Sam Nunn professor of practice at Georgia Tech University.
Put this all together and you get a former Fed official who is uniquely qualified to discuss all the latest forces driving the FOMC’s policy decision play book this week.
Certainly all the policy steps and decisions in the decade going in and out of the Great Recession have given Dennis a former insider’s keen perspective on how Jay Powell and his FOMC team are assessing where inflation and employment risks stand.
On the employment front, Dennis sees a labor market that is softening but still on solid ground as data series like weekly jobless claims show companies holding on to workers as everything from tariffs to deportations make them reluctant to lay people off even if business has weakened recently.
On inflation, the former Atlanta Fed president sees numbers that so far have looked good as inflation inches down closer to the 2% target. However, he also sees growing uncertainty on where prices head next due to tariffs, possible labor market shortages, and fiscal policy. And now, at this May FOMC meeting, he adds Israel’s war with Iran and oil prices as a potential inflation driver.
Which leads to another important way in which Dennis is uniquely qualified to assess the geopolitical forces that may - or may not - affect the Fed now. Unlike most Fed officials and many Fed economists, he has a keen global perspective. Early in his career as a banker at Citicorp, he held various international positions in Saudi Arabia and Iran among other venues. Later he was president of Heller International Group which had activities in commercial banking, finance and merchant banking in North and South America, Europe and Asia.
Besides his work in international banking and finance, Dennis has served on the faculty of Georgetown University's Walsh School of Foreign Service. He was an adjunct professor at Johns Hopkins University's Nitze School of Advanced International Studies.
So dive in and hear what he has to say about why he still sees the Fed staying faithful to its rate-cutting path even if all of these domestic and global forces may force it to also be faithful to its wait-and-see, be-patient path until September, October or beyond.
As for other international developments I did ask Dennis to comment on the Group of Seven meeting in Alberta which wrapped up today. Spoiler alert: he did not seem too concerned about President Trump’s early departure, which probably was necessary given US policy interests and global risks in play; he also noted that the G-7 conference is largely “a ceremonial event.”
No action at this meeting maybe guidance for one cut this year 00:01:32.460
I am pretty much in agreement with the consensus view. Certainly, no move at this meeting; very unlikely to see any move in July. As one observer put it, the FOMC wants to take the summer off and resume in September. I see September as the earliest that we could see policy action which in all likelihood would be a cut. But who knows? And again, as you pointed out, this is a meeting in which we have projections, and I think the dots may show one cut for the year as opposed to two. But that depends at least when you're measuring that by the median cut. That just depends on a very few people changing their projection slightly, and you end up with a median of one instead of 2, but I do think that's possible as well.
War adds fog/ it matters for policy but not until it has impact 00:03:18.300
Well, <the Israel-Iran war) certainly adds one more element to the fog of uncertainty that the fed is facing. The other key. Elements, of course, are are tariffs. the mass deportation or labor situation. and and the fiscal situation. So you add to that a 4th element that's that is very unpredictable. Having said that the in my experience over 10 years the committee considers and pays attention to geopolitical developments. but doesn't react until there is some blow back on the Us. Economy in one way or another.
Facts on the ground suggest this war could last 00:04:03.120
So, what have we seen so far? We've seen oil prices rise a bit and then sort of stabilize. and I think you can conclude that all parties would like to avoid some kind of an oil crisis in coming out. Iran needs the income to pursue their side of the war.
Even Israel recognizes that that much of its support depends on not ruining somebody else's economy. So I think this is simply something to watch. I do believe that there's a good chance this goes on for quite some time, meaning days, if not weeks, as the Israelis pursue, really trying to knock out, all aspects of the nuclear program in Iran. And some of that is a very difficult task, as we know. Fordo, for example, is underground, and is a very difficult target to hit. So, I think we should brace ourselves for this being a story that lasts some time. but in the meantime the effect on the Us. Economy is not significant.
Healthy economy; somewhat softer 00:06:00.280
<The economy is> still pretty strong, still pretty healthy. All things considered. We have a claims, some claims numbers tomorrow because of the holiday on Thursday. They're accelerating, so the committee will have the advantage of being able to look at the most recent claims numbers. I think claims are where you would see a marked change in the health of the labor market. So, I follow the claims numbers fairly closely. But having said that, yes, the labor market is softening. and it's gone from hiring post pandemic to basically holding on to your talent, but not to substantial layoffs. We are not in a recessionary environment. Firms are not yet feeling that they need to adjust their labor cost element of their cost structures so overall. I think you have to say that the employment picture is reasonably benign, although gradually softening. I think what the committee would be watching for is a real labor market cliff of some kind where the market goes sour very, very rapidly. You see it in layoffs, you see it in claims. You see it in the unemployment rate. and some of the other key ratios that the Fed follows. That's what they're you know they're watching for, and so far… it hasn't happened.
Complex inflation issues pending 00:08:37.480
Well, the most recent inflation data have been pretty encouraging in some respects they're softer in the most recent cycle of data. But the situation is that there is an inflation discontinuity that is hanging out there as a possibility, and that is related to tariffs. We do not know, and I don't think the committee has conviction, one way or the other. that it will be a one-time event or will meaning a 1 time price effect or something more persistent. so they simply cannot ignore the fact that the inflation picture might change rather dramatically in a relatively short period of time, and that uncertainty related to the direction of inflation is likely to persist as long as we have this on again off again. A pattern of trade policy announcements and that's not just one sided. It's not just from our side. I took a took note of the Chinese decision to resume export licenses for rare earth minerals and strategic magnets, but with a 6- month deadline or a 6-month expiry date, and that means that unless an agreement with China that is more durable is actually achieved. In 6-months we could see a reversal of their policy, and that could create some effect on the US economy that is not welcome. So you know this pattern of imposing and then pulling back and tariffs and export controls and such, it is contributing to this continuing uncertainty, and I don't think the committee can ignore that when they're thinking about inflation.
Rate hikes extremely unlikely; good news Vs bad news moves 00:11:55.200
I wouldn't rule out a rate hike if the inflation situation, and particularly inflation expectations, really worsen. But I think the base case continues to be something between hold and the resumption of rate cuts. Now, not many weeks ago there was, and in in much commentary there was discussion of good news cuts and bad news cuts. So what would be a good news cut? That would be that we were basically through the tariff problem. That you could. You had much greater clarity as to the trend of the economy. and the committee decides that they can ease policy further to support a slowing but nonetheless non recessionary direction of the economy. I don't see that situation developing by September. In other words, I can't see them making a good news cut in September. I think the bad news cut is that, as they weigh their two sides of the mandate, the risks to the employment side are just far greater than inflation. Maybe because of the internal dynamics of an index of inflation. We get offsets for things that are affected by tariffs and overall. The inflationary or price picture remains relatively stable, but nonetheless, employment begins to really deteriorate. That would be a bad news cut. Is that going happen by September? You don't see it in the numbers today. Maybe, we'll see something tomorrow when the claims come out that that gives pause. But I wouldn't totally rule it out as a possibility.
Is the Fed being bullied; does it affect its decisions? 00:14:36.870
I'll let me just start with the basics. First, J. Powell is highly respected by his committee and his leadership has been very steady and he's repeated over and over again that they will simply do what they think is the right thing for the US economy. So, if the circumstances arose in which they had to react, let's say, in a bad news cut to employment deterioration, the committee would make that decision, and they would communicate it in such a way as to support it with the evidence that's in the data. and I don't see any reason why the committee would feel any reticence just because of the Trump administration or Trump's own noise around cutting rates to take that action, if it were justified on objective terms in the economy. So my answer to your question is no.
The Fed and the SEPs- what you might expect 00:16:48.960
…If you if you go back and look at the March summary of economic projections and you go under the hood. What you see, is almost an even split between two and one <rate cuts>. At that time there were 3 outliers, I think. but it was. It was fairly close. But when you calculate a median. you end up with two, and that's what gets broadcast. And, it sounds like it's ‘a committee decision’ - which it is not! And it sounds like it is a message that the committee wants to push, which it is not! So, as I said earlier, it wouldn't take much in the way of a change of view between two and one to end up with a median of one <cut> coming out of this meeting. People can make far too much of the dots, and particularly of the median dot. And I think the overall picture is the committee has not given up on the idea of resuming rate cuts. But the lack of clarity and the uncertainty situation persists arguably even complicated further by geopolitical events in the Middle East, and therefore it could be pushed back a bit, so more of the easing would be toward year end, or even into 2026. I think that's a not implausible scenario coming out of tomorrow's meeting.
Powell will stay well away from making fiscal policy statements 00:19:42.000
I don't expect to hear much from Jay Powell quite frankly. It's just too touchy a set of issues for a Fed chair to weigh in on. and therefore I think he will be very reluctant to say very much it. The fiscal situation is a factor in the shaping of the overall outlook for the economy and the concern quotient has risen rather dramatically in capital markets around the world. And here in the United States and in the public in general, the concern factor has risen. I would say in recent months. almost to a sense that we're at an inflection point in terms of at least recognition that this is something that that has to be addressed, even though it's going to be very difficult politically to actually address the root causes of the deficit and the growing debt. But Powell as, you know, he has to stay in his lane, which is monetary policy. and we'll have rather little to say, even though you, you get a sense that the fiscal outlook is, in fact, now more of a prominent factor in shaping how the economy performs.
The G-7 meeting is largely a ceremonial event 00:23:12.300
I think, G-7, even in the best of circumstances, is a largely ceremonial gathering. It's not a gathering in which the principals actually get together and make joint decisions. So it's simply an event that perhaps adds to the connectedness of the world by giving leaders a chance to interact with each other. But I would not make too much of it. And the fact that this one was, let's just say, was complicated by some decisions on the part of the US, our administration, means that I would not make much of it.
Dennis P. Lockhart
Dennis Lockhart’s career includes time in the private sector, academia, and government.
From 2007 to 2017 he was president and CEO of the Federal Reserve Bank of Atlanta. In this role, Lockhart served on the Federal Reserve’s chief monetary policy body, the Federal Open Market Committee (FOMC).
He is currently a distinguished professor-of-the-practice in the Nunn School of International Affairs at Georgia Tech. He serves on a number of for-profit company boards and non-profit boards and advisory councils. He serves in an advisory role for Sante’Ventures and Market News International. He chairs the Board of Advisors of the Johns Hopkins School of Advanced International Studies.
In 2017 and 2018, he spent a year as a senior fellow in the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School where he studied U.S. national infrastructure policy.
Before becoming a central banker, Lockhart was a member of the faculty of Georgetown University’s Walsh School of Foreign Service where he chaired the Masters program concentrations in global commerce and finance and international business–government relations. He also was an adjunct professor at Johns Hopkins University’s School of Advanced International Studies. Simultaneous with these teaching roles, he was chairman of the Small Enterprise Assistance Funds, a sponsor of emerging markets private equity funds.
Earlier he was managing partner of a boutique private investment firm with activity in Africa and Latin America and president of Heller International Group, a Chicago-headquartered financial firm with activities in commercial finance in Europe, Asia, and Latin America. In 2000, he chaired the Advisory Committee of the U.S. Export-Import Bank.
At the beginning of his career, Lockhart held various positions, both international and domestic, with Citicorp/Citibank (now Citigroup). He worked in Lebanon, Saudi Arabia, Greece, Iran, New York, and Atlanta.
Lockhart was born and grew up in California. He was educated at Stanford University and the Johns Hopkins University School of Advanced International Studies. He also attended the Senior Executive Program at the Sloan School of Management, Massachusetts Institute of Technology, and served as an officer in the U.S. Marine Corps Reserve. He holds an honorary doctorate degree from Georgia State University.
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