MNI INTERVIEW: Ex-Fed's Lockhart Sees No Rush To Cut In 1H

The Federal Reserve will put off interest rate cuts for as long as U.S. growth and employment stay solid to gather as much evidence on falling inflation as it can -- likely through the first half of the year, former Atlanta Fed President Dennis Lockhart told MNI.

When the U.S. central bank does finally kick off the easing cycle, it would be reasonable to expect a quarter-point move every other meeting and three by year-end to match the FOMC's December projections, Lockhart said in an interview. That would mean investors have overestimated how soon and how quickly cuts will come. Traders are pricing in a first rate cut by May and five by December.

"Policymakers want to get it right and will tend to delay as long as they can a major change in policy direction so as to have the most convincing evidence," Lockhart said. "They would not like to begin a cutting cycle and then have to reverse it."

"If there are no signs of negative developments in the economy, employment is holding up and disinflation continuing, then they can put off a decision and wait for more absolutely conclusive evidence on inflation." (See MNI INTERVIEW: Fed Likely To Wait For June To Cut-Carpenter)

RISK MANAGEMENT

Friday's PCE inflation report is expected to show the Fed's preferred price growth measure holding at 2.6% and core inflation slowing two-tenths to 3.0% in December, but the FOMC isn't ready to declare victory in containing prices, Lockhart said, adding that it remains unclear whether the last mile on inflation will prove more challenging than the road thus far.

Some doves will argue shorter-duration inflation measures show "we've already crossed the last mile,” he said. On the other hand, if the untangling of supply chains acts as powerfully as monetary policy in cooling inflation, then as that effect fades, progress is at risk of stalling, Lockhart said.

"If the risk of inflation reaccelerating is perceived, the best approach is to hold off starting cuts," he said.

MARCH OPTIONALITY

The FOMC will also have in mind the scenario in which data turn south and it must cut rates to ward off further deterioration, especially in the labor market, Lockhart said. A March rate cut would seem to be more in line with such a development.

"When I look at a decision tree regarding March, the first question is: Are there signs of negative developments? If so, how severe? If the data are worrisome, then start cuts. I don’t think right now they’re there," Lockhart said. "The economy is quite solid, so initiating cuts would be the beginning of a process of normalization, and I think they have some luxury of time to decide to start that."

Next week's FOMC statement may drop the reference to "policy firming" in the discussion of future policy actions, without going as far as referring to policy easing, Lockhart said. (See MNI INTERVIEW: Fed Can Wait Until Summer To Cut Rates-English)

"The situation has all the ambiguity of an approaching inflection point," he said. "The official communication is likely to be minimalist, and rather noncommittal."