MNI INTERVIEW: Fed Will Bide Its Time On Rate Cuts -Lockhart

The Federal Reserve is moving cautiously in evaluating whether disinflation will continue before pulling the trigger on rate cuts this year, former Atlanta Fed President Dennis Lockhart told MNI, adding he sees no sign of a resurgence in price pressures.

Investors' dovish interpretation of Chair Jerome Powell's comment to Congress this month that the FOMC was “not far" from being able to cut rates is overdone, Lockhart said in an interview.

"I don't think it signals in any way a change in his or the committee's posture to a more dovish one," he said. "If anything, the market should pick up on the expressions of patience and caution. We're proceeding carefully -- that's really the core message."

No rate cut is expected at this week's meeting, but policymakers are expected to update economic projections that reaffirm cuts are coming later this year if inflation sustains the downward trend that began in mid-2022.

Lockhart said it would not surprise him if the median of expectations from the 19 FOMC members falls to two cuts from three in December, but it would not represent any significant shift in Fed thinking.

"Way too much weight is put on the median. Look at the range of views -- 15 of the 19 were in the camp of two to four cuts in December, and the difference between the twos and the threes was one dot. All it would take is a couple people to change to shift the median. It wouldn't take much for that to happen, and it wouldn't surprise me at all," he said.

"Everyone would make a big deal out of that as if it were an actual committee communication, which it's not," he said. If some officials now see one fewer cut this year, "it would represent a touch more caution and a touch more willingness to be patient and take their time."

NO RESURGENCE

The January and February CPI reports have been a bit stronger than expected, but historical experience calls for taking first-quarter data with a grain of salt, Lockhart said. (See MNI INTERVIEW: Fed Should Get Going On Rate Cuts -Bullard)

"Half of my 10 years at the Fed we had very quirky first quarters from which you could not extrapolate for the full year. My best depiction of what we're seeing is a pause or a stall in the disinflation story and the numbers for the most part going sideways."

Retail sales are cooling, as is the Atlanta Fed’s GDPNow running estimate of GDP growth, which shows 2.3% for the first quarter, down from 3.2% in the last three months of 2023. "We're in a slowdown mode in the macro economy, and that would be consistent with either a stable inflation picture or continuing disinflation, not a resurgence in inflation." (See MNI INTERVIEW: US Productivity Boom Can Mask Price Pressures)

By year-end, inflation could be around 2.5% but the fed funds rate still some 200 bps above its estimated longer-run level as policymakers continue to evaluate the direction and sustainability of an inflation rate around 2%, Lockhart said.

"The committee will move rates down in a gradual fashion," Lockhart said. "The economy is tolerating this level of interest rates -- it's not producing bad outcomes at the moment. So that suggests being conservative about how rapidly you reduce the fed funds rate."