MNI INTERVIEW: Lockhart Sees Fed Lifting Rate Estimates in SEP

Federal Reserve officials are likely to again revise higher their projected path for interest rates next month as they reassess the degree of restraint needed to cool a booming labor market, former Atlanta Fed President Dennis Lockhart said in an interview.

Just as the market outlook finally converged with the Fed's above-5% December rate projection this week after a remarkably strong January jobs report, the FOMC could spring another hawkish surprise, Lockhart told MNI's FedSpeak podcast. Employers added over half a million workers last month and revisions to 2022 data showed job growth was even better than previously thought.

"It is stronger than they expected and stronger than they desire. I think that adds up by March to a set of projections that perhaps show a higher terminal rate and show a conceivably longer or at least sustaining the long picture of the hold period," Lockhart said. The majority of FOMC members late last year expected rates to pause at just above 5% this year.

"If I were to handicap it, I would say it would be a touch more hawkish in March than it was in December."

PROMISE TO DO MORE

Once rates hit their peak, the hold period could go on for "quite some time," with the FOMC maintaining a bias to raise rates more if needed, Lockhart said. Inflation is heading solidly downhill, but going the last mile to 2% could be a winding road.

"Market expectations of the beginning of a cutting cycle in the second half is really quite divergent from the signals coming out of the committee," he said.

The Fed stepped down the pace of rate increases to a quarter point earlier this month as its preferred PCE inflation measure slipped to 5% in December, down from summer peaks above 7%. Official rates are currently in a range of 4.5% to 4.75% and the FOMC said it foresees "ongoing increases."

Officials would rather avoid having to restart hikes after a pause, because financial conditions could ease too much between moves, Lockhart said. Yet the same logic calls for an explicit promise from the FOMC to do more if needed.

"If they pause they're prepared to resume again if conditions call for it -- they have to put that disclaimer in some form of communications. That is understood, really, all the time, but they need to make it explicit."