Dennis Lockhart always has a clear, authoritative view on what he sees the Federal Reserve doing ahead of its policy meetings. He never speaks in a way that suggests he knows ahead of time what is going to happen. It’s always a logical, informed, analytical approach that brings in all the important facts, trends, data, comments from Fed officials and adds them up to come to a conclusion.
This time it’s a bit different when I ask him what he expects at this March Federal Open Market Committee meeting, the second since President Trump was inaugurated on January 20.
With everything that has taken place since Trump took over, I ask Dennis is the ground has shifted a bit under the Fed’s feet during this short period.
”Well, at the risk of being overly dramatic, I think in a matter of a few weeks, the underlying assumptions that the Fed was operating on have shifted fairly dramatically,” he says.
”Now, I think they are looking at a quite different picture. They're looking at tariff induced inflation risk. They're looking at the potential for a downturn into the recession. Word is in the in the air and even some talk about stagflation era conditions,” he adds.
Dive in and hear what Dennis has to say. Why he thinks Trump hasn’t pushed on the Fed and it’s policy yet, but there will likely to be trouble for the Fed down the road. Why the Atlanta Fed’s GDP Now index is sending even more worrisome signals as it moves “starkly from expansion to contraction in the current quarter.” What would - will? - push the economy into recession if there is one. His view of inflation and what inflation expectations are telling us.
This is far more than a preview of the Fed’s March meeting. It’s a an analysis of where the Fed is now as the ground continues to move swiftly under our feet and what to watch for ahead.
Big eco-landscape shifts in last few weeks 00:01:09.260
Well, at the risk of being overly dramatic. I think, in a matter of a few weeks the underlying assumptions that the Fed was operating on have shifted fairly, dramatically, and those are assumptions related to the outlook for growth, related to what was happening in terms of inflation and disinflation, and general soundness of the economy. Now I think they are looking at a quite different picture. They're looking at tariff, induced inflation risk, they're looking at the potential for a downturn, and the recession word is in the in the air… and even some talk about stagflationary conditions. And it's a very tricky time for them.
Little data yet so this meeting will be more ‘wait-and-see’ 00:02:11.460
…the true data based indications of this change in direction are a little bit early. There is not a lot that is accumulated. But there are some worrying, worrying developments. and the Fed will have to take note of that. In the context of this is a meeting that's not going to produce a policy action of any kind, and the messaging will probably be. We are patient, and we're in a wait and see mode
Fed is laying low…00:03:39.960
My reading of Powell and the Fed overall is that they are practicing lie low, you know. Stay out of the focus of or out of the crosshairs of the Trump Administration and try to message in such a way. That's not really political but just deals with data and deals with reality that they're dealing with.
Fed not in Trump’s Cross-hairs…yet 00:04:16.000
The Trump Administration hasn't taken on the Fed yet. Hasn't really challenged the Independents quite yet. It's not been a front page kind of story quite yet. <Kathleen: Do you expect that?> I do. My private view is that there's likely to be trouble for the fed down the road that could partly be because of slowness to cut, or maybe no cuts at all. I mean, certainly there is a scenario of not cutting, if inflation gets to be quite troublesome.
A troublesome scenario…for the Fed 00:05:00.270
Let me just speculate a little bit about the economy. You have an unusual situation of a very sound employment market that might not deteriorate … greatly. Then you could have the very unusual situation of the employment side of the Fed's mandate not really deteriorating greatly, while inflation is worsened by the tariff dynamics. In that case the Fed probably would not cut and might even hike. So I think you, if you imagine that situation, then you can imagine why the Trump Administration might take issue with monetary policy
The Bessent-Powell connection 00:07:20.460
Treasury Secretary Besant is easing into his job, so to speak, getting used to everything. Part of that is a weekly meeting with Jay Powell. Now I don't know factually whether that has begun yet, but it has always been the pattern for the Fed Chair and the Secretary of Treasury to get together once a week, usually for a meal just to compare notes on the economy and to and you know neither side is trying to influence the other. They're just basically comparing notes. I suspect that Besant has started that with Powell, and that has a tendency to create a cooperative environment and maybe a less adversarial environment.
Lockhart’s main concerns…the Atlanta Fed’s GDP-NOW Index 00:08:58.750
Let me start with those that concern me most. The product of my own former Fed bank, GDP-Now has moved rather starkly from expansion to contraction in the current quarter GDP-Now is to be taken seriously in the 3rd <month of a quarter>, because all it really is an accumulation of data series or data releases that get plugged into an equation that mimics the GDP calculation. The most recent revision was a contraction that is -2.1%.
Data suggest the consumer is pulling back 00:10:37.730
Well, Monday there was a revision further into negative territory, and most of that was driven by consumer activity. So that concerns me, because when you start getting the consumer pulling back…. when you get broad-based consumer pullback, then you're really getting to what motivates or… drives the performance of the economy. So that is concerning to me at the same time.
Economy is still ‘progressing satisfactorily’ 00:11:44.410
We certainly haven't seen developments that would spook the labor force broadly and contribute to pull back in terms of consumption. So that seems to be reasonably positive. The inflation numbers are not, let's say, not worsening dramatically. They're just bouncing around above the Fed's target. But nonetheless. you know there are some indications of slight disinflation, and so …you could say that the economy still appears to be performing quite satisfactorily.
But trade tariff conflicts ae coming 00:13:42.390
A product of the uncertainty that we face today and the potential the worst case or bad case potential play out of the trade conflicts that are coming down the road.
Already in a slow motion fiscal train wreck 00:15:32.830
We're already in a serious fiscal situation. Some would even say, fiscal crisis. It's a slow, slow train wreck. Not a, you know, not an immediate train wreck, but nonetheless it has train wreck, potential.
The dual mandate is a legal obligation 00:17:07.650
One thing that people tend to forget when they start talking about fed policy is that there is a legal obligation under the dual mandate to pay attention to inflation and employment. So the committee and the fed always gravitate to their statutory requirements. And that's terribly important… You can have various growth scenarios, but you have to pay attention to inflation and employment, because that those are the statutory objectives
Inflation expectations important and elusive & a trigger 00:20:22.190
If we were to assume that inflation, expectations are deteriorating, the Fed is going to take that very seriously. Even though the notion of inflation expectations, in in my view, is a little bit elusive. In some respects it's hard, it's a hard thing to measure, and none of the tools are perfect. It is taken very seriously by the committee. and if the committee gets convinced that inflation expectations are becoming unanchored, that's likely to trigger some action.
Commentary on ‘the dots’…very confusing 00:23:34.980
<Lockhart on what he might do…> ...you know, just the better part of valor here is to just keep my dots pretty much the same as I did in January until the situation clarifies a bit more. I think that could be at work. If there's going to be a skew coming out of this meeting, it probably would be net hawkish. Meaning, some of the outliers might move into the twos. The 2 category and some of those in 2 might see one or fewer rate cuts. In order to kind of continue to display focus on the inflation mandate and so you know… I'm talking… I'm sort of free associating here as opposed to giving you a clear answer, because I think it's very confusing
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