MNI INTERVIEW: Ex-Fed Lockhart: FOMC May Be On Hold Thru 2020

By Jean Yung

     WASHINGTON (MNI) - The fed funds rate may be on hold through all of 2020

absent material change to the outlook and as Federal Reserve officials stay on

the sidelines ahead of the presidential election, former Atlanta Fed President

Dennis Lockhart said in an interview.

     He expects the rate-setting Federal Open Market Committee to keep the funds

rate target range "below neutral" at 1.50% to 1.75%. "They're comfortable with

the current accommodative position, because they feel it underpins extending the

expansion and leans against some downside risks that continue to be out there --

primarily trade and global weakness," he told MNI.

     Beyond that, "If the committee gets through the July meeting without a

policy move, then it's unlikely there will be any moves in September and October

before the election -- for fear of misinterpretation of that decision," he said.

"In such a scenario, the rate policy will be on hold for almost all of 2020."

     --VIRTUOUS CIRCLE

     Healthy consumer spending remains key to the expansion, and Lockhart sees a

"virtuous circle", with a healthy labor market supporting consumer confidence,

which in turn supports growth and steadily boosts employment.

     The stronger-than-expected November jobs report "gives the committee more

confidence that they've got it right," Lockhart said.

     Meanwhile, with the global picture stabilizing, some of the concerns on

which this year's insurance cuts were predicated are easing, he said. On the

other hand, a limited trade deal with China would not alter the policy posture

either.

     "If there was to be a rate cut in 2020, it would be because the economy

falters, as in a pretty serious downturn," Lockhart said.

     --FRAMEWORK REVIEW

     Policymakers are carefully weighing their options on how the Fed targets

inflation, including whether to make up for past inflation misses by allowing

the rate of increases in prices to rise above target for a time, but "it's not a

foregone conclusion that they'll make a change," Lockhart said.

     Inflation behavior after the financial crisis is defying much of the theory

and practice of monetary policy for decades. Central bankers in advanced

economies are finding it extremely difficult to get inflation up to target and

don't understand all the factors involved, so the Fed is rightly focused on

looking at alternate strategies.

     But Lockhart added: "You have to be wary of unintended consequences with a

change of approach. I think they're being extremely careful about this. They

don't want to have to reverse it in a matter of a few months or meetings."

     Meanwhile, contingency planning for the next recession has policymakers

examining the likely effectiveness of balance sheet tools, forward guidance and

negative rates. Lockhart does not see negative rates as likely in the United

States, but reckons that officials are open to combining bond buying with

forward guidance in new ways so that "they're firing with more than one canon"

should circumstances demand.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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