Atlanta Federal Reserve Bank President Dennis Lockhart said Wednesday he supports the continued unwinding of Fed asset purchases, but short-term interest rate hikes should be delayed until at least the second half of next year.
And Lockhart, who will be a voting member of the Fed’s policymaking Federal Open Market Committee next year, said rate hikes should be delayed even further if the economy and labor markets do not improve as much as expected.
The FOMC reduced purchases of longer-term Treasury and mortgage-backed securities by $10 billion a month for the third straight meeting March 29, and said the first rate hikes would come “a considerable time” after asset purchases end.
Fed Chair Janet Yellen told reporters the “tapering” of bond buying likely will be completed “this Fall” and the first rate hikes would come “around six months” later, provided the economy performs as hoped. This was widely interpreted as implying a rate by mid-2015, if not sooner.
But Lockhart made clear he thinks rate hikes should be further delayed, in a speech prepared for delivery to the Greater Miami Chamber of Commerce.
Pointing to the “considerable amount of slack” remaining in the economy and in labor markets and inflation running below the Fed’s 2% target, he said, “the FOMC is still significantly short of achieving its two mandated objectives.”
And so “based on my working medium-term outlook, I see the latter half of 2015 as the likely time frame for the first move to higher rates.”
Like most, Lockhart blamed weak first quarter economic growth, which he estimated at less than 2%, largely on the weather, but said the weakness nevertheless causes concern whether the economy has lost underlying momentum.
He said he expects GDP growth to reach near 3% in the second quarter and beyond, but he will be looking at more than just the growth rate and the headline “U-3” unemployment rate, which now stands at 6.7%. He said he will look at a broad array of labor indicators which point to more slack in the labor market to decide the appropriate stance of monetary policy.
Even if the economy grows as he expects, “monetary policy should remain quite accommodative for some time,” Lockhart said. “To be even more precise, any uptick in the policy rate is unlikely to be warranted until at least the last half of next year.”
But if the economy falls short of his expectations, Lockhart said rate hikes should be further delayed.
He said “sustained GDP growth in the neighborhood of 3% will generate sufficient movement toward the FOMC’s objectives to justify a gradual liftoff in policy rates sometime in the latter half of 2015.” But he added, “if that progress fails to materialize, a later liftoff date than I am assuming will likely be appropriate.”
Lockhart suggested the third round of “quantitative easing” has served its purposes, calling “forward guidance” on the path of the funds rate the FOMC’s ” main instrument of monetary policy.”