Dennis Lockhart served ten years as President of the Federal Reserve Bank of Atlanta starting just as the Great Financial Crisis, and the worst recession since the Great Recession, were just getting ready to unfold. As a member of the policy making Federal Open Market Committee, he worked alongside now Fed chair Jay Powell, and under two former Fed chairs, Ben Bernanke and Janet Yellen. In my view, Dennis was a centrist, never an ardent hawk or dove on interest rates, and someone who always seemed in step with the prevailing view on the Committee. And this innate sense he has of where the Chair and his team are leaning at any point in time has persisted.
So where does Dennis see the Fed heading now? Will what seems to be a consensus view for the Fed to keep the key rate steady for now prevail? Or will Fed Governor Chris Waller’s clarion cry for a rate cut NOW cause other FOMC members to follow suit?
Dive in and hear why Dennis not only does not see a 25 bps rate cut to be announced now, and sees the posssibility no cut at the next meeting either. Right now he sees a “substantial constituency” that will want to wait and see all the data that comes out from this mid-summer meeting to the early autumn policy decision, which is always the longest break between meetings all year. This means more inflation and jobs data will be available to provide a clearer view of what the trend in the economy really is..
Will Fed governor Chris Waller’s threat to dissent sway the majority of the FOMC to vote for a cut now? Dennis says no. The other 18 FOMC members will have their chances to speak. He is quite sure the consensus will be not to cut, “so it’s not likely to change the dynamic at all,”
Looking ahead, Dennis sees a risk that if tariffs dribble out slowly into the economy in the form of some higher prices and more inflation this could, if it persists, even lead to rising inflation expecations and potentially- but not likely- to an eventual rate hike. And this is the kind of reason he says that keeps the Fed on hold into the end of the year. Pessimism is not his base case, but a risk he sees that is another reason for the FOMC to keep its rate-cutting powder dry longer than expected.
The Committee is split- 00:01:28.540
Well, I think the committee, judging from the June Sep dots, is a pretty split committee. There were two substantial groups, those who favored 2-cuts before year end. and then those who favored no cuts before your end. If you lump the outliers, it looks like a committee that's sort of divided down the middle. So, Chris Waller is clearly a leader in the let's cut now and get on with it …group. But I think there's a substantial group that wants to wait for greater clarity on inflation particularly, and this meeting will probably evidence the differences of opinion. It's not going to be contentious in the sense of people screaming at each other, but it certainly is a meeting in which a lot of views are going to be expressed.
No cut in July…and probably no sense of leaning either 00:03:03.930
Well, I I agree with Jim <Bullard> that they're not going to cut rates at this meeting. That's not not in the cards, I think at all. It's a more interesting question of how much foreshadowing of a rate cut would J. Powell probably do in his press conference? and I'm more in the school that he's going to try to position the committee as waiting and seeing for a variety of reasons. One is the interval between the July meeting and the September meeting is the longest calendar interval on the annual meeting calendar. So we get more data between July and September than you get in other cases. So, I'm not sure why you would be tipping your, you know, tipping off a move in September, when you have so much data coming in that will tell you more particularly about the tariff effect on inflation. So I think the committee's communication and Powell and his press conference will be a little bit cautious about saying too much about September.
Waller’s Gauntlet: rate cut or I dissent ß unusual 00:04:48.540
I can't recall. Certainly not a governor. I think what is unusual is is in fact, 2 governors who could dissent at this meeting. I think the circumstances are unusual. I don't want to read anything into the strength of his statement and his views, but I'd simply point out that he's been mentioned as a candidate to succeed Jay Powell. There are audiences out there that he certainly perhaps wants to not cross. So who knows what's in his thinking? I think we should assume that it's pure economic analysis. But in any event, I think it's an unusual situation to to state in advance of a meeting that you're going to dissent.
Threat of dissent- No impact on Committee dynamics 00:05:54.470
No, I don't think it changes the dynamics of the meeting at all. The way the meetings are conducted is, everybody has a chance to speak. They go around the table a couple of times. Governor Waller will speak as the other 18 do, and his views will be clear, and then the consensus. In this case the consensus not to cut, I'm quite sure. will be put on the table for a vote, and he will vote and that's it, you know. And I think everyone kind of expects this outcome. So it's not likely to change the dynamic at all.
Jay’s position is clear…not so for his successor 00:07:16.200
I think Jay Powell has already staked out that position, and will continue to do so, and he'll stand firm, I think, and I happen to believe he'll serve out his term. But your question is a nuanced one, and that is. How do the investor markets the capital markets of the world… how will they observe the incoming chair? Who succeeds Powell? As I said, it's a nuanced question, but I am prepared to think some damage has already been done, because I think. regardless of what happens in the interview room with President Trump investors are going to expect that something was said that satisfied President Trump about the direction of interest rates and I don't know how strong a commitment. That would be, but certainly probably not a very aggressive defense of the independence of the Fed. And I think, regardless of who comes into office, they're going to have to prove themselves to the committee as well as to the investor markets that the Fed continues to formulate policy independently. And so, I think this is going to be a pall cast over a new chair for a period of time, until that chair really shows his or her colors.
No motivating reason for policy change: wait and see 00:09:29.140
Well, the economy is performing rather well, I think, showing its resilience. That's the term that's so often used. and so far we have seen only modest effects of tariffs on inflation. I think some of the inflation and tariff effect questions remain looming out there, and much will be learned in the coming weeks and months. But, as of now, the economy is in pretty good shape, and so, in a very simple, stupid way, you might ask if the economy is performing pretty well, why would you add stimulus at this point? Why not just be patient, and let the well-performing economy proceed. And so I think, going into September, you know, you're going to be looking for either clear evidence that the tariff effect is really not significant and or evidence of a deteriorating economy that requires some stimulus to right the ship. And so I I would be advising patience, continuing with a posture of wait and see. Because there's simply much more to learn, I think, in the coming weeks.
Always pluses and minus; nothing special to prompt action now 00:11:54.830
Well, I think the argument is, and it was reflected in a rather good article this morning in New York Times. I thought that there are two ways to look at the economy. The one that I depicted earlier, is an economy that on balance overall at a high level is performing adequately. And, the other, is that there are cracks showing in the economy. And you've just cited a couple of those cracks. And you know the committee always has to weigh how much weight they're going to put on negative news or adverse news in the overall mosaic of the economy. And so I think Chris Waller is pointing out some of those things that are signs of weakness. There are always signs of strength and weakness in any picture of the economy. There are always winners and losers from any setting of the policy rate. So, you know, I don't think the committee will react too-strongly to some of those questions about the strength of the economy.
Progress made/trade war averted 00:13:47.750
Well, I think there's no question, progress has been made. And I think the 1st point is that a global trade war is highly unlikely, and you know that has been averted. and we have much more of a sense, at least in principle of what the trade deals are going to look like with some major trading partners most recently Europe also, Japan. Certainly China still hangs out there. That's a a very big one. Mexico, Canada. They're open questions that haven't yet been resolved. But we we've made progress in knowing what that trade picture will look like. I don't think we have achieved clarity on the inflation effects of the whatever turns out to be the steady state tariff regime.
Still a lot of questions about these trade deals- 00:14:53.470
And even what is the steady State tariff regime beyond the headlines is still an open question. Most of these deals have been frameworks essentially the kind of thing that can be put in 5 or 10 pages. Well, trade agreements typically take a long time because they're highly detailed. And there are hundreds of pages to negotiate. So, there's much yet to be learned about what these trade deals mean in in practice. And the articles already on Europe are pointing out that some parties in Europe are interpreting things that were agreed to differently than perhaps the Trump administration is interpreting them. And there's questions about even the frameworks that have been negotiated. So it seems to me. It's still a work in in progress that needs to be nailed down. Surely if they're going to set prices that stick for a while. We'd like to have further clarity.
Tariffs and transitory… Vs eventually - 00:16:50.180
The way I think about it, this is perhaps not deeply researched point of view, but nonetheless, the way I think about it is that the tariffs affect more than simply finished goods, finished consumer goods, that come in ready for shelves. We'll have a tariff, let us say 15%. And that's going to be absorbed somewhere in the supply chain. But input commodities and components, particularly commodities like steel and aluminum currently are have very high tariffs. and it will take some time for those tariff costs to work their way through to end products because they are inputs into processes that may take many weeks or even months for an end product to emerge. So, I think you could have a bit more of a slow-motion effect here of the tariff influence on ultimate price prices, at least in certain categories. And that concerns me. That's why I think it's premature to declare at this point, or even perhaps in September, premature, to declare all clear from the point of view of tariff effect.
An idealized future Vs a flawed reality 00:19:15.240
Well, the inflation target… one way to think about it, would be if the inflation target were between 2 and a half and 3%. By many measures, we would be at the neutral rate now, but we're not at, because the target is 2%. So clearly the neutral rate is below the current setting of policy. How far below remains to be seen. I think the term recalibration, or a resumption of recalibration from the post covid reaction or inflate post covid inflation reaction of the committee. Essentially, what is in question here? When will that resume? And I think that's the desired path of the committee. Even those who are calling for no cuts this year. Still, I believe, <they> would like to see the longer-term direction next year and the year after of the policy rate as declining. But that's an idealized world that doesn't have the kinds of shocks. Sometimes big shocks, sometimes little micro shocks that in my mind mean that you very seldom ever get to equilibrium, which is really what the R-Star idea is about.
A contrarian possibility! 00:20:50.470
So, you know I think it's an uncertain future. I would not put a big bet on a rate increase, but I don't think you can completely rule it out. As I said, I wouldn't totally rule it out. I don't think you ever rule out anything really, never say never. When it comes to the direction of the policy rate. I think it is a scenario that's unlikely. It's probably closer to a worst-case scenario, but it would go something like this… that my depiction of the effect of tariffs on inflation rolls out in slow motion over many months. And the price levels that people who really care about rise and sometimes markedly. and that dislodges the anchored inflation expectations. People begin to expect that this is going to continue. Inflation expectations begin to get away from the committee, and in those circumstances, I think, particularly, if there seems to be a dynamic in play, that prices are rising on a more persistent basis rather than just a one-off, one-time basis. I don't think you can rule out a rate increase.
Still too early to tell about a September rate cut- 00:23:42.870
In some respects too early to tell, you know, because you can tell me what the next
two CPI prints, the next two PCE prints, the next two PPI prints; these are going to show you…if you could fast-forward to September 13th or something like that, I'd have a better sense of what to say in answer to the question. But, you know, I've seen - we've seen - this movie before that the markets get really aroused about a cut coming in the near future. and they get ahead of the committee. And as we talked about earlier, there's a substantial constituency within the committee that really wants to wait and see really wants to be patient about this and get much more certainty about how the trade policy is going to affect the overall economy. and as long as things are going reasonably well. I think that constituency is going to have power in the decision making.
Dennis P. Lockhart
Dennis P. Lockhart became the fourteenth president and chief executive officer of the Federal Reserve Bank of Atlanta on March 1, 2007. He retired on February 28, 2017.
Lockhart was born in Bakersfield, California. He attended Stanford University and earned a bachelor's degree in political science and economics in 1968. In 1971, he earned a master's degree in international economics and American foreign policy from the Johns Hopkins University School of Advanced International Studies. He also attended the Senior Executive Program at MIT's Sloan School of Management in 1994. He served as an officer in the US Marine Corps Reserve from 1968 to 1974.
Lockhart started his career with Citicorp/Citibank (now Citigroup). From 1971 to 1978, he held various international positions in Saudi Arabia, Greece, and Iran. From 1978 to 1986, he was senior corporate officer of the Southeast office of Citibank in Atlanta. From 1987 to 1988, Lockhart was head of the firm's Latin American debt-to-equity swap investment program, designed to restructure sovereign debt.
From 1988 to 2001, Lockhart worked at Heller Financial, where he served as president of Heller International Group, which had activities in commercial banking, finance and merchant banking in North and South America, Europe and Asia. From 2001 to 2003, he was managing partner at Zephyr Management LP, a private equity firm based in New York with activity in Africa and Latin America.From 2003 to 2007, Lockhart served on the faculty of Georgetown University's Walsh School of Foreign Service, teaching in the master's program. In this role, he was chairman of the program's concentrations in international business-government relations and global commerce and finance. He also was an adjunct professor at Johns Hopkins University's Nitze School of Advanced International Studies.
Before joining the Atlanta Fed, Lockhart served as a member of the boards of directors of several companies, including CapitalSource Inc., Tri-Valley Corp., and Greenfield Holdings Credit Ltd. He was also chairman of the Small Enterprise Assistance Funds. He served on the Advisory Committee of the US Export-Import Bank and chaired the committee in 2000.
Currently, Lockhart serves on the board of directors of the Metro Atlanta Chamber of Commerce and St. Joseph's Health System. He is a trustee of Agnes Scott College and the Atlanta International School. He also chairs the World Affairs Council of Atlanta and the Midtown Alliance.
During Lockhart's tenure, the Federal Reserve faced some of the most traumatic economic events since the Great Depression of the 1930s, including the financial crisis and Great Recession. Lockhart has given many speeches on the financial crisis, monetary policy, and the economy.
Under Lockhart's stewardship, the Atlanta Fed won several awards. It was voted one of America's Top Workplaces by Workplace Dynamics in 2013. In 2012 the Atlanta Journal-Constitution ranked the Atlanta Fed number nine in the large-company category as one of the top workplaces in Atlanta.
