MNI INTERVIEW: Balanced Risks Call For Gradual Cuts -Lockhart

MNI (WASHINGTON) - A Federal Reserve now paying equal attention to its inflation and employment goals is more likely to lower interest rates gradually, by making a series of 25-basis-point cuts this year and next, former Atlanta Fed President Dennis Lockhart told MNI. 

The latest CPI report appears to confirm a slow settling of the inflation rate toward 2% and the recent rise in unemployment has been driven by a slowdown in hiring and an increase in the supply of workers rather than layoffs – all favorable signs for the outlook, Lockhart said. 

"The committee is very satisfied with progress on inflation but recognizes there’s more to be accomplished, and it does not want to put the inflation mandate on the back burner. At the same time, the labor market remains quite healthy. It’s hard to say there is extraordinary weakness in employment – there’s a desired slowing," he said in an interview. 

"Viewing the mandates as equally balanced argues for a more gradual approach, which is a 25-basis-point move next week."

STEPPING UP TO 50

Some futures traders remain unconvinced that the FOMC won’t start its cutting cycle with a bigger step down in rates. A 50-basis-point cut next week is unlikely though not entirely out of the question, Lockhart said, and could be rationalized as a downpayment to protect the employment market and buy officials a bit more "tactical optionality" for the remaining two meetings of the year.  

"They’ll reserve the right of doing 50 if there’s a strong reason to do so between now and year-end," he said. "This is a pretty agile committee, and they’re always trying to communicate in a way that doesn’t flabbergast the markets when they make a move."

A material deterioration in the labor market would prompt a step up to 50, Lockhart said. (See MNI POLICY: Fed Prefers Gradual Rates Easing If Jobs Allow)

At 4.2% to 4.3%, the jobless rate remains below estimates of its longer-run rate, but 4.5% could cause alarm bells to ring, Lockhart said. 

"The key indicators are nonfarm payrolls, the unemployment rate, jobless claims, JOLTS data and anecdotal information about layoffs. They’ll synthesize all those elements to get an overall sense of whether the employment picture is relatively stable or seems to be deteriorating materially and require some protection," he said.  

LAST HALF-MILE

At the moment Fed officials appear confident they have ample space to cut without risking a resurgence of inflation, Lockhart said. He expects updated economic projections next week to show three cuts this year and four to six next year. 

"It’s fair to say some amount of soft landing has been achieved already. There’s every reason to be optimistic that more months of avoiding a recession and making progress are ahead," he said. "I can imagine they get 100 basis points under their belt then decide it’s time to take stock." 

Next year, if the labor market doesn't fall apart, worries over inflation may again come to the fore, Lockhart said. 

"I don’t think the committee is accepting the current 2.5% inflation level as a steady state. They would still like to see it soften toward 2%. The stubbornness of the housing data probably gives some pause. That last half-mile may prove difficult." (See MNI INTERVIEW: US Inflation Resurgence Still Possible- Koenig )