Dennis Lockhart is not betting on a Federal Reserve rate hike this week as the ongoing Iran War keeps oil prices high and inflation stays well above the Fed’s 2% target. When I ask him what he thinks the news headline will be as the Fed wraps up its two-day meeting, this monetary policy centrist, who served as president of the the Federal Reserve Bank of Atlanta from 2007 to 2017, looks for no change but is not ruling out a hike either.
”I think there is some small chance or minority chance that there actually is a hike,” Dennis says. “Having said that, my sense of it is that the committee will decide to hold - the headline will be something like Federal Open Market Committee holds and decides to wait for more data.”
One big reason for the Fed to wait to hike till autumn to cut its key rate is the long interval between the July and September policy meetings, which “is a bit longer longer than most meetings and therefore more <economic> data actually comes in by the September meeting,” Dennis says. Another reason for the Fed to wait is that Kevin Warsh gives the traditional opening Fed Chair speech at the Kansas City Fed’s annual Jackson Hole Symposium next month which will give him a chance to frame the Fed’s policy situation.
As for the Fed’s messaging Dennis says it will be that “the trend in inflation is unacceptable. It’s unsatisfactory. June was a cooler month <for inflation> , but that... doesn’t make a trend.”
He points out that supply-side factors, such as energy prices and ongoing AI investment, are unlikely to reverse quickly, making inflation a persistent concern. The Fed will also be drivien by geolitical events, particularly the conflict with Iran, on inflation and policy: “the conflict with Iran is going to be protracted and we’re going to be dealing with it for quite some time.”
So by September Dennis expects the Fed to move and one 25bps hike will not be enough.
”I think they could probably frame it as a recalibration… and stop it at two and see what happens. I think the tendency is just to do one rate hike, one 25 basis point rate hike, as you know, not making much of a difference, frankly,” he says. “And I think that’s a correct assessment. So they probably need to move 50 basis points in order to, to to make sure that their action isn’t pointless.”
With the debate over Warsh’s call for the Fed to pull back from forward guidance going strong, Dennis has “some sympathy with the view that some discipline has been lost in recent years in that informal Fed speak form of forward guidance.”
Spoiler alert: he says “when I was there, it was pretty clear we were we were advised…you can talk about the outlook for the economy. You can talk about maybe some of the decisions ahead that the committee might face, but you really should not be signaling your point of view in advance of a meeting.”
”Otherwise you could just mail in your vote and not bother to go to Washington. And people were pretty disciplined about that.”
Fed headline...holding hope? 00:01:11:01
One headline might be holding hope. And but the consensus is that there will be no move at this meeting. I agree with that. Although I don’t think it’s a 100% probability, I think there is some small chance or minority chance that that there actually is a hike backdrop. I would have to say is I think the next move is a hike.
No more serious consideration of rate cutting on the FOMC 00:01:46:07
I do not think there’s any serious consideration of cuts. So the question is the hike of this meeting. I think the case can be made to hold, and I think the case or a case could be made to go ahead and hike at this meeting. Having said that, my sense of it is that the committee will decide to hold in the headline will be something like Federal Open Market Committee holds and decides to wait for more data.
See you in September; see you when the summer’s through 00:02:25:03
The interval between the July meeting. In the September meeting is a bit longer than most meetings, and therefore more data actually comes in by the September meeting. So in my experience, there was a pretty strong temptation in July just to wait till September. Another factor at work, although we don’t know how Kevin Warsh will handle it, is that the chair always has an invitation to speak at Jackson Hole, giving the chair a chance to frame the situation. Speak strategically, conceivably set up something that may be coming in his reading of the committee. So we have that also in late August. So there’s a big temptation to hold and to wait till September. And I think this committee will follow that.
Trend is not the Fed’s friend 00:03:40:02
Well, I think first you have to acknowledge that the trend in inflation is unacceptable. It’s unsatisfactory. June was a cooler month, but that as Kevin Warsh said, that doesn’t make a trend. And even if you sort of bank that as an indication of a somewhat cooler trend, it’s still unsatisfactory. So the committee looks to me like it’s going to be forced to act.
Pressure factors erratic but generating pressure 00:04:14:17
In the meantime, since the timing of the data collection for the June reports on inflation, you’ve seen some reversal of the old price. Although this morning, Monday morning, it’s backtracked a bit. You’ve seen the reimposition of tariffs. The AI investment seems to be continuing in an unrelenting fashion. So some of the factors on the supply side that are pushing the price pressures have, there’s no reason to believe they’re going to reverse dramatically.
Protracted Iran war likely ahead-- 00:04:54:17
I’m my private view, based partly on my experience, is that the conflict with Iran is going to be protracted and we’re going to be dealing with it for quite some time. So I think you can make the argument that after such a strong rhetorical start, the committee with the chair need to back their rhetoric with some action, and there’s no time like the present. So that would be the case I would make.
Forward Guidance is out of favor 00:06:33:08
Well, first, I think it’s a more fulsome subject and then simply one sentence in a statement. First, I would distinguish between official forward guidance of the committee and fed speak, official forward guidance of the committee through official communications. The statement to some degree, the minutes and of course the Q&A. Although we could spend a day talking about the projections and the Q&A and how they should be evaluated. Those are our official communications of the committee, and it is understood that only the chair speaks for the committee. That’s why there’s a disclaimer at the beginning of every Fed speech that that that speaker is speaking for him or herself. And, and that’s repeated every time. Yeah. So there’s official forward guidance. And then there is, I guess, what you call informal or unofficial forward guidance, which is Fed speak, meaning the speeches that everyone makes, the interviews, the, you know, the commentary that even sometimes ends up in print.
Did the Fed slip into bad practice? 00:07:59:03
And I would I have some sympathy with the view that some discipline has been lost in recent years in that informal fed speak form of forward guidance. And what I mean by that is when I was there, it was pretty clear we were we were advised. You know, you can talk about the outlook for the economy. You can talk about maybe some of the decisions ahead that the committee might face, but you really should not be signaling your point of view in advance of a meeting.
Mail it in!! 00:08:37:16
Otherwise you could just mail in your vote and not bother to go to Washington. And people were pretty disciplined about that. But in recent years, it strikes me at least that many people speaking for themselves. But members of the committee or participants in the meeting have more and more signaled their policy preference and what they’re likely position in the meeting and so forth in advance of the meetings.
Family fight- not feud 00:09:08:15
So what’s the point of the meetings if it isn’t a family fight? You know, if it isn’t a real good discussion. So I have some sympathy. I think Kevin Warsh is addressing both official, official and informal, but I think there is also very much in this some frustration with the number of voices that are out there speaking for the Fed and feeding this industry of Fed watching.
Dial it back! 00:09:40:20
So I think his task force, I hope, will clarify how he is defining forward guidance from the point of view of really dialing it back.
What’s fair game 00:11:06:15
Well, I you know, I think you can make statements about the trend in the economy and particularly in this particular case, inflation, and make general statements about, you know, possible reactions to that, emphasizing that it’s your own personal view and not that of the committee. And, you know, that unfortunately gets taken as more official than it should be consumed as.
Handicapping the Fed speakers 00:11:39:13
And the, you know, Wall Street and Fed watchers have a they have some knowledge of who to listen to and who not to listen to on the committee. And when people who are part of the inner circle of the committee, those who really determine the options that the committee will consider going into a meeting when they speak, it’s, you know, it’s taken as gospel.
Focus back on the economy instead of Fed policy moves 00:12:36:23
Yeah, I think I think Kevin Warsh is trying to put the focus back on the economy and, and the market as an independent evaluator of, of the tea leaves of the economy, as opposed to an obsession with what’s the next move coming out of the Fed. And I think there’s a that’s a healthy debate and a healthy position on his part to take. You know what to add. I guess I would say that I think that kind of recalibration of the role of Fed communication in the. Iterative process between the central bank and the markets is worthwhile. We’ll see how the task force treats that.
All Fed statements are conditional 00:14:01:08
It’s if it’s taken to literally and not understood to be conditional. And borrowed guidance is always conditional. Anything that the central banker says in this world has to be conditioned on, on the world evolving the way it is assumed at the moment of that, that statement, it gets taken as a commitment, or at least it’s too strongly evaluated as a commitment. And so that’s something that the central bank doesn’t like to be cornered by its own words. And that’s part of this, this debate as well.
What the Fed wants to see in order to decide… 00:15:49:07
I think they want to see they have two reports, two cycles of inflation reports that they can consume between now and the second day of the September meeting. And I think they want to see what those numbers appear to be. And they have to be unpacked to see what’s happening in services, inflation and what’s happening in shelter and so forth, as well as goods.
Can a hammer do the work of a screwdriver- wrong tool 00:16:15:06
If they see a reversal to some extent, then the June reports will be taken as an anomaly and they’ll be back facing a both uncertain and not necessarily positive trend in inflation. Just staying at the pre June level, I think, is viewed as unsatisfactory and probably requiring some tightening. Now parentheses here, it’s a reasonable debate as to what effect a demand tool is going to have when the inflation is being pushed by supply factors, and whether or not a quarter or even a half would make much difference.
Rate hikes won’t slow AI spending 00:17:05:19
For example, I would say the primary actors who are in pushing the AI investment numbers are unlikely to back off in any way just because the federal funds rates 25 or 50 basis points higher. I think, you know, they - those organizations - see such a compelling generational type of, of opportunity that they’re going to go full bore in spite of the Fed’s efforts to try to constrain demand with higher interest rates.
Rate hikes won’t stop the war-related expectations 00:17:46:01
War is a is a wild card, and its effect on all prices is a wild card. And the higher prices tend to have a long tail. And so it can fuel inflationary pressures for a number of months. And you know, finally, I think inflation expectations could be more fragile than we’ve seen in the past. The public, in my view, tends to conflate inflation with higher prices.
Special shocks put market beliefs beyond the Fed’s grasp 00:18:23:23
That is, higher prices are price level. Inflation is a rate of change. But in the minds of the public, when they are paying for dollars $5 a gallon and seeing their money basically go away at the gas pump, they’re thinking that inflation is higher. And so consumer or public inflation expectations could be becoming more tenuous, the anchoring of them- more tenuous.
If expectations shift policy will change 00:19:03:04 -
And I think that’s going to get the committee’s attention big time. Frankly, again, from my experience, when inflation expectations begin to move, it compels policy action of some kind..
Supply shock often do not shift trend and so are downplayed 00:20:13:22
Well, a fundamental of bad behavior, Fed policy formulation. Is that what they’re really trying to discern is the underlying rate of broad inflation. And that can be an elusive thing to discern. But that’s what will move them from a policy point of view. And it’s taken as more or less gospel that supply shocks often reverse as supply and demand rebalances, and that they <see> the supply shocks are less persistent than what they’re looking for, which is the underlying rate of inflation.
War is temporary so , so are its effects? 00:21:07:22
So I think these coming meetings will some of the discussion revolve around that question? What are we looking at here and how should we respond? The elusive reaction function of the committee. And there would certainly be arguments that in spite of the geopolitical environment, we are looking at temporary phenomena here, and therefore it doesn’t require that we act while inflation expectations remain anchored.
Ah...but what about that TREND? 00:21:50:02
But having said that, the counterargument is the underlying rate of inflation appears to be elevated in spite of, or only partially affected by the geopolitical environment.
On tolerance, can-kicking, supply shock ignoring… 00:22:44:08
I think the clock could be ticking. And to some extent I think this has been set up by the very strong beginning that Kevin Warsh, had as he came onto the scene as the fed chair, how emphatic he was about restoring price stability. The committee has no tolerance for the elevated level of inflation. You know, he could have been softer, but he was very, very strong. And I think that sets up to some extent a credibility risk on the part of the committee. And, therefore, I’ll just say it this way. The clock could be ticking on them, having to act to pursue action after that rhetoric.
Frame a rate hike as a ‘recalibration’ 00:23:59:12
Yeah, I think they could probably frame it as a recalibration and, stop it at two and see what happens. I think the tendency is just view one rate hike one 25 basis point rate hike, as you know, not making much of a difference, frankly. And I think that’s a correct assessment. So they probably need to move 50 basis points in order to, to to make sure that their action isn’t pointless.
50bp: the easy way or the hard way 00:24:37:20
And that could be done in one fell swoop in September of or could be over two meetings and those two meetings could be the September and the late October early November meeting. Or they might skip one and go to December. You know, I think all things considered, they don’t want to appear to be behaving politically. Having said that, while I was there, the committee felt it was the better part of wisdom to not take an action on the eve of an important election, or fear that that would be interpreted as political when their real reasons are nonpolitical. So, there could be a reason to skip the meeting just before the election.
Warsh is playing the long-game 00:26:33:00
He’s a very, very sound practitioner of the central Bank Arts, and I don’t think he is playing a short term political… let’s just say good graces or anger kind of game. He’s not worried about that balance. He’s worried about doing the job of the central bank. And if he has personal views, it’s that he’s playing the game for the long term. His legacy will be whether this inflation is tamed and whether the economy gets on as sound of footing as possible. And I have no doubt about that. That does suggest that maybe there is some shift from when he was trying to get the job, call it campaigning for the job with the president in the white House to the way he’s going to conduct himself.
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.Dennis Lockhart, former president of the Federal Reserve Bank of career includes time in the private sector, academia, and government, including a decade as president of the Federal Reserve Bank of Atlanta.
He is currently a distinguished professor of the practice in the Sam Nunn School of International Affairs at Georgia Tech.
