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--Fed to Discuss Policy Path Once Neutral Rate Reached
By Jean Yung
     WASHINGTON (MNI) - With the Federal Reserve almost certain to hike at its
meeting this week, discussion could quickly turn to another increase in the
federal funds rate in December after jobs reports which "almost defy gravity,"
former Atlanta Fed President Dennis Lockhart told MNI.
     "It's a foregone conclusion that they will go ahead and raise the fed funds
rate range by a quarter percent, staying on a gradual path of raising rates
toward neutral," Lockhart said in an exclusive interview.
     In addition to hiking to a target range of 2% to 2.25%, the Federal Open
Market Committee could send new signals about the policy path ahead, including
moving towards better defining the neutral rate of interest and how to proceed
once this level is reached.
     More immediately, recent employment reports "almost defy gravity in
continuing to show very healthy job creation," supporting a fourth hike for the
year in December, he said.
     But there are risks on both sides of the outlook. Fiscal stimulus continues
to work its way through the economy, supporting demand and potentially driving
productivity higher as businesses are encouraged to invest. Yet the fiscal
effect could wane faster than expected next year.
     Regional Fed presidents will also report on the impacts of trade
restrictions in their districts. These effects, though, are likely to be treated
as a risk, but "probably not a current performance factor they see in the data,"
Lockhart said.
     One wrinkle for December is that Powell will begin holding press
conferences at every meeting starting in January. "That gives them a bit more
flexibility than we had in the past, where effectively we didn't make policy
changes without the ability to explain those changes in a press conference,"
Lockhart said.
     The FOMC might also ponder the question of the neutral setting for interest
rates, though Lockhart believes "there's reasonable consensus around using 2.75%
or 3%", a level that the FOMC anticipates reaching by mid-2019.
     Picking an internal working estimate may be necessary because "they will
have to decide -- not at this meeting but in future meetings -- whether they're
going to pause or go forward once they reach neutral with further rate
     Fed Chairman Jerome Powell will likely direct the committee to hammer out a
framework and working assumptions on which they'll premise policy after arrival
at neutral, Lockhart said.
     In the dot plot forecast of future rate increases, dots showing two moves
in 2019 likely indicate support for pausing at neutral, Lockhart said. Those
projecting three or more probably favor taking rates into so-called restrictive
territory, either because of high inflation, the potential for such, or an
overheated economy, he said.
     In the June SEP, seven officials saw two or fewer hikes and eight saw three
or more, assuming the Fed raised rates in December. Officials' estimates of
longer-run equilibrium interest rates ran between 2.3% and 3.5%, with nine out
of 14 at 2.75% or 3%.
     GDP growth "running at 3%-plus can be interpreted as a pretty hot economy,
which brings risks that some on the committee will think are serious or at least
need to be a concern in setting future policy," Lockhart said.
     Others take the view that a hot economy is good for drawing people back to
the workforce and renewing the skill sets of those who have been jobless, he
     The FOMC estimates the economy's long term potential growth rate to be 2%
or a little lower.
     The FOMC will also release its first 2021 forecasts, but Lockhart cautioned
that projections three years ahead often offer little new information.
     Officials are "very unlikely to project a turn in the economy or a radical
turn in policy in an out-year which is inherently uncertain anyway." 2021
probably "looks like more of the same."
--MNI Washington Bureau; +1 202-371-2121; email:
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