MNI INTERVIEW: Former Fed's Lockhart: Bet on a March Hike

--Solid Economic Growth Warrants 3 Hikes This Year

--Material Deterioration in Infl Data, Significant Volatility Could Derail FOMC

--Flattening of Yield Curve Could Pitch Curveball in Fed Plan

By Jean Yung

     WASHINGTON (MNI) - Solid growth in the U.S. economy and a healthy labor

market will likely warrant three interest rate increases this year, with the

first likely to come in March, former Fed official Dennis Lockhart told MNI in

an exclusive interview this week.

     Lockhart, long a reliable guide to Fed centrist thinking during his decade

at the helm of the Atlanta Fed, said his presumption is that the Federal Open

Market Committee gathering March 20-21 is "live" for a possible rate hike,

barring some material setback in the inflation data. 

     "I think a move is likely. It would take some economic course change to

presume otherwise," he said. "We would have to see a deterioration in the

inflation numbers," particularly in core inflation, and "that would have to

happen in a relatively short period of time."

     The quarterly FOMC meetings that include a press conference are typically

better candidates for taking policy actions, which means the Fed could move

again in June, September, or December. With three hikes penciled in for the

year, Lockhart speculates the committee may choose to pause mid-year or at

year-end.  

     One scenario would involve hikes in March, June and September with a stop

to "reappraise" in the fourth quarter, Lockhart said. Another is a breather in

the middle of the year, which "could revolve around the behavior of the

inflation numbers, for example, or any sense of change going on in trajectory of

the economy."

     --POSSIBLE CURVEBALLS

     The flattening of the yield curve could put a wrinkle in the Fed's plan. If

long-dated yields don't move higher with short-term rates, the FOMC "may feel it

needs to pause to reassess what's going on in the longer-dated markets and not

get itself in a position of contributing to a flatter yield curve by pushing up

the short end," Lockhart said. 

     Finally, the committee has historically tended to "shy away from moving

right into the face of a headwind that has developed," such as a major political

event or choppy waters in global markets. 

     "The committee can stay true to the idea of the gradual rise in the policy

rate but skip a meeting to let things calm down," Lockhart said. 

     --INFLATION GOAL

     Some on the FOMC have argued the Fed should wait for evidence of a firming

of price pressures before next raising rates -- partly also to affirm its

commitment to the 2% inflation target and bolster longer run inflation

expectations. Charles Evans and Neel Kashkari, presidents respectively of the

Chicago Fed and Minneapolis Fed, dissented from the majority decision to raise

rates in December for those very reasons. 

     But Lockhart views those arguments as "legitimate" though they represent a

"minority view" on the FOMC. Policymakers project core inflation to hit between

1.7% to 2.0% by year-end, with the median forecast at 1.9%. Some on the FOMC

would view that as "very close to" the 2% target, Lockhart said.

     "All things being equal, there's a desire to get off the zero lower bound

as expeditiously as the economy allows," he said. A benefit of doing that is

building itself a cushion and having in the Fed's arsenal "a more powerful tool

to react to a downturn." 

     --SLIDING NEUTRAL RATE 

     With projections of the so-called neutral rate falling steadily over the

years from over 4% in 2012 to 2.75% today, the point at which the Fed will

choses to stand pat could come as soon as a year and a half from now, Lockhart

said. 

     "I do think the neutral rate estimate is a very significant part of the

picture today," he said. How views of the neutral rate adjust remains to be seen

as the economy continues to chug along faster than its longer run rate, but it

could happen that a pause will come sooner rather than later, "when the

committee says in effect we've done enough of raising, it's time to quit any

tightening and pause until we see new conditions develop." 

     Lockhart, who retired last year as Atlanta Fed president, was one of few

Fed officials boasting extensive business sector experience in the U.S. and

abroad during the financial crisis. Prior to joining the Fed, he had been

president of the investment firm Heller Financial and held leadership positions

at Citigroup and private equity firms. 

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

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