Atlanta Federal Reserve Bank President Dennis Lockhart Tuesday night said calculating the timing of first interest rate increase as six months after the end of the large scale asset purchases is “too mechanical” and could be on the “short end” of a potentially longer time span.
“I feel that computing six months from the final date of the quantitative easing program is way too mechanical,” Lockhart told reporters following a speech at the Louisiana State University, in Baton Rouge, Louisiana. “I would argue six months is at the short end of a period which could be somewhat longer.”
Lockhart, who votes on the Federal Open Market Committee in 2015, also said the Fed has “just begun” to discuss the tools needed to normalize policy when the time comes.
“I think there will be a role for the Fed Funds rate,” he said. “I think there will be a role for the overnight reverse repos, and clearly a role for interest on excess reserves, and possibly a role for the term deposit tools.”
As the Fed looks at normalizing policy, Lockhart said he agreed with remarks made by New York Fed President William Dudley recently expressing concern about possibly stopping reinvestment of maturing securities before the first rate hike.
“I’m with him on the view that that’s probably not an intelligent way to begin a normalization process,” Lockhart said.
“Making a decision to stop reinvesting as a first in a sequence could bring on an undesired market tightening before the intention was to raise interest rates,” he added.
He called expansion of overnight reverse repo facility being tested by the New York Fed “encouraging,” but added “I think we still have a lot more to do to ensure that the tools are ready for an ultimate beginning of a normalization process.”
Lockhart does not have a strong preference as to whether the FOMC finishes its large scale asset purchases in October with a $15 billion cut, or in December with a $5 billion cut.
“I think when we get to that point, it will be very clear the program is over, or about to be over, and at this stage I haven’t heard a strong argument for why it should be one way or the other,” he said. “What’s important now is that we conclude the program in an orderly way without any big surprises to the market.”
Lockhart expects inflation to return to its 2% target goal in the medium term but he told reporters he would be willing to see inflation rise slightly above that level if the labor market was still underutilized.
“I still draw the line at about 2.5%,” Lockhart said, pointing to previous communication from the FOMC indicating a range of 2% to 2.5% inflation as acceptable.
He also weighed in on the debate over progress in the housing sector. “I’m not prepared to say there’s long term weakness that’s going to persist” in the housing market, Lockhart said. Recent data in housing, including existing sales building permits and new home sales, is “encouraging,” he said.
“The way I would characterize it is that housing as a sector did weaken over that last several months, but now is showing some signs of life,” he said. “I take that as encouraging that housing will improve from here as the year goes on.”
Lockhart added he’s “not overly optimistic, but certainly positive, on the outlook for housing.”
Asked about the labor market, Lockhart said “there are some signs of tightness” in certain labor sectors. In the Gulf states, which make up most of the Atlanta Fed’s district, he sees a need for workers such as welders. Other sectors looking for employees include: the information technology sector and the transportation sector, particularly truckers. “Some job categories are difficult to fill,” he said.
But he warned that while he has heard some of this anecdotally from contacts in his district, it’s not seen in all sectors and across all geographic location.