Dennis Lockhart was president of the Federal Reserve Bank of Atlanta from 2007 to 2017 riding the crest of the Great Financial Crisis recession waves alongside then Fed Board Governor Kevin Warsh who now has just under four months under his belt as Fed Chair.
When Dennis joined me six weeks ago to handicap what the Fed would do at its July meeting, he saw a chance above target inflation would lead to a 25 bp rate hike. But instead he predicted that officials would opt to hold policy steady again and take advantage of a nearly two month pause between the July and September meetings to get more inflation and jobs numbers and a better sense of if, when, and would they should and would hike rates.
So what does he see now? ”I think there’s a high probability of a 25 basis point hike,” Dennis says as he next opens the door to the FOMC making a NOT widely epected move.
”I may not have much company in the view that I would not rule out them front-ending their hikes with a 50 basis point hike,” he says. “That makes it a lot more comfortable to skip or pause in October, and wait until year end to see how things how the inflation trend goes.”
Dennis points out that the tradition at the Fed has been not to make a major policy decision on the eve of an important election a hike in the key rate just before the midterms could be seen as a move “perceived to try to damage the Republicans not a healthy situation.”
”The better part of wisdom is just not do anything just before the midterms,” he says. “So my case for 50 is get your 50 basis points in play. Now it would have much more effect than a 25 basis point hike. Every body on the committee knows that a singlye hike is not really going to make that much diference, particularly given the supply side impulses that are affecting the inflation trend.”
So dive in and hear Dennis also explain why Warsh, who critics have assumed would never make a move like this for fear of enduring severe pushback from the President, just might do it.
Spoiler alert: This former Fed bank president sees a situation where Warsh might do this and benefits the Fed Chair could reap from this. “If the consensus of the committee were to do this, I think, yes, he could get on board.”
”I think it would be a major plus to his efforts to gain credibility in the early stages of his incumbency in the job,” Dennis say. “The markets would say he’s for real, and what he says is going to be translated into action.
Hot inflation calls for action 00:01:05:14
Well, I think there’s more clarity in the sense that the relatively hot inflation report basically counters the softer inflation numbers we saw in a couple of reports over the summer. Some were latching on to those reports to make the argument that there was a trend, a disinflationary trend underway. And I think the most recent CPI report does not support that view.
A clear durable narrative: the case is to attack inflation 00:01:38:23
And I therefore I think they have sufficient rationale for attacking inflation with a hike. Well, if we hadn’t had the CPI report or had it come in showing so showing softer inflation numbers, the doves on the committee would have more basis for arguing to hold. And I just don’t think that that is the case now. I do think you have to think about this. And on two levels. One is a sort of tactical level where you’re following each data report and trying to extrapolate from that report to what an underlying trend is. The second is to step back and ask yourself, what is the narrative and has the narrative changed? The narrative is they’ve been missing the inflation target for over five years. It’s elevated by any number of measurements. And the employment side of the dual mandate is solid and stable. So the issue is inflation. And the narrative really has not changed.
So in my view, strategically as opposed to tactically, there’s a compelling case for doing something to back up the rhetoric that we heard earlier in the summer.
25 bp- a high probability; 50 bp also possible 00:03:49:09
I think there’s a high probability of a 25 basis point hike. I may not have much company in the view that I would not rule out their front-loading their hikes with the 50-basis point hike. That makes it a lot more comfortable to skip or pause in October, and wait until year end to see how things how the inflation trend goes.
Be data depending but don’t act in front of a major election 00:04:44:03
Well, I can see the logic of it. The tradition, certainly while I was there, is not to make a major policy decision on the eve of an important election. At the same time, you know, everyone who’s been a part of that process would say it’s data dependent. They try to make the right decision for the economy, shouldn’t be influenced by politics.
Fed will want to be policy-inert ahead of the November elections 00:05:10:03
But making a policy decision just before the midterms, at least by some part of the public, is going to be interpreted as a political move. And in this case, it’s not going to be a cut. It would be a hike, and therefore it would be a, you know, a move perceived to try to damage the Republicans, not a healthy situation.
Raising rates by 50bp now gets you policy-pass comfort in October 00:05:38:17
The better part of wisdom is just not do anything just before the midterms. So my case for 50 is get your 50 basis points in play. Now it would have much more effect than a 25 basis point hike. Everybody on the committee knows that a single hike is not really going to make that much difference, particularly given the supply side impulses that are affecting the inflation trend. So you could just front end it and wait until December and see what the world looks like then.
Could Kevin get on board for 50bp now?? 00:06:57:11
That’s a really very good question. It’s hard to read. Hard to read him in some respects. If the consensus of the committee were to do this, I think, yes, he could get on board. I think it would be a major plus to his efforts to gain credibility in the early stages of his incumbency in the job. The markets would say he’s for real, and what he says is going to be translated into action.
Brace for White House Reaction 00:07:35:17
Or at least he’s going to try to translate it into action. So, you know, the question may very well be, how does he deal with the blowback from the White House? If he were to move 50 basis points, you know, there’s been stuff written about this he could claim he could basically blame it on the committee, and he might very well take the high road and say, look, inflation is our problem. And I understand the sensitivity to raising rates. But this was a necessary act. And I think Kevin might very well take the high road and, and simply stake out the position that I’m a real inflation hawk and this shows it.
What about other FOMC members who have been dovish? 00:09:21:03
Well, I pay a lot of attention to what John Williams has to say, both because of his eminence as an economist and because he will often, I think, give some sense of the position of the leadership group going into a meeting. I interpreted his CNBC interview a few days ago, and apparently there was an off-the-record scrum afterwards as not necessarily indicating that come what may he may support a hold, but rather preserving optionality, keeping the committee’s options open.
Waller has views but is he an ‘insider?’ 00:10:01:09
That’s the way I heard what he had to say. Others may differ from that view. Waller I don’t know whether he is truly enough of an insider in the policy leadership group to indicate where the committee is going. I think it may be his personal view, and he may not prevail in his personal view and in the meeting.
I do think the consensus is, has built up dramatically or at least considerably for a hike at this meeting.
Dots and SEPS-are they being undercut? 00:11:19:10
Well, let me first paint the context. I think the context is we know Kevin Warsh is not participating in the exercise. That makes the SEP exercise somewhat less serious than if there were uniform participation. There may be other defections, effectively people saying if the chair is not going to do this, I think I’ll just, you know, not do it or not do it completely.
Use SEPS and DOTS as a hawk communications event? 00:11:55:24
And I, you know, I think rather than view it as necessarily a forecast, some may view it as an opportunity to signal strength of conviction in terms of hawkishness. So what how will the dots turn out? My guess is that there will be some who submit 75 basis points by year end. The strong Hawk group, who may be thinking in terms of just simply taking back last year’s cuts.
A complicated skein of forecasts to unravel 00:12:31:22
And there may be some who are submitting, which took place last week, of course, hold positions and may not bother to revise regardless of the decision of the meeting. Assuming it’s a hike, they may still show hold. So I’m expecting the median to come out at 50 basis points. But I think to try to really derive any signal from the dots in terms of the year end policy rate, you have to look at the spread.
It’s more than just ‘what’s the Median?’ 00:13:07:18
You have to look at the range of opinions reflected and try to interpret that as opposed to just latching onto the median.
Kevin will not surprise us with Dots 00:13:25:24
No, I don’t think so. All right. You know, I, I think it would… He’s very much trying to engineer a quieter, less communicating, less forward guidance Fed. And the dot plot is pretty central to that. So I think I think he will stick with his position of not participating.
Warsh seems to see significant breadth in the overshoot 00:14:30:20
Well, I, I took note of what Kevin said in his speech at Jackson Hole that was basically saying that a diffusion index shows that, that the majority of components over what are their 190 some components of PC inflation have been rising. I you know, I don’t pour over the entrails of all the inflation data. So I’m not in there studying at all the time.
Dominated by supply side effects? But inflation is spreading 00:15:00:18
My overall sense is you have broadening inflation that is influenced by supply side factors that demand management can’t do much about. But nonetheless, the inflation trend is elevated and it is broadening. Furthermore, there have been recent reversals of some of the supply side aspects, namely the reversal from earlier in the summer of the price. The continuing elevated price of diesel, the second and third order effects of well, and gas and energy prices generally that tend to they tend to sort of seep into the inflation numbers in a more gradual fashion. So I think it is a big bet to base your policy decision position on fading price pressures. Is I that’s a bad if I were on the committee be hard for me to take because of some of these supply side factors.
The Middle East: No early reversion to ‘normal’ 00:16:56:14
Well, I, I don’t think it’s going to revert to what we would consider normal or pre-war conditions quickly. I don’t see that happening. I think the Iranians, who are no question, are under tremendous economic pressure, nonetheless see that they have a tool that can influence their destiny, and they’re going to use that tool and try to actually gain monetarily from it in the widening to the Red sea and the activities of the Houthis simply adds to that, that that trend or that impulse to try to use these tools to their advantage.
Price levels matter and especially to consumers not just inflation 00:17:47:20
So I think the better bet, frankly, is, well, prices will remain elevated. They may not rise. And what can happen? This is important for the general public at least, inflation is a rate of change. The price level can rise and then stick at a high level. It’s very, very painful for households and businesses in the United States to have these high levels.
But the inflation rate per se may somewhat relent, you know, or may come down a bit or at least stabilize. But I think high oil prices, I would bet on them staying high for for quite some time.
High rates yes- and not just in the US 00:19:04:06
Development in the markets. The rise in the long-term yields and the reality that that’s a global phenomenon. It’s not just the United States is important. And I think it feeds into the committee’s periodic review of financial stability risk. I don’t remember when that next financial stability report is due… It wouldn’t be this meeting. Maybe that’s something they will get in October.
Asset prices and fiscal debt… 00:19:37:05
Staff does a very thorough job of looking at factors like elevated asset prices, leverage in the system, that kind of thing. I’m watching it carefully, Kathleen, because - and this is very much a gut feel - this set of circumstances feels different than circumstances we’ve seen in the past that have passed maybe the milestone of a $40 trillion gross debt position of the US. And having passed that number is maybe affecting thinking too much, just a number. But this does feel to me like there could be a kind of mini run on sovereigns occurring around the world that would certainly augur higher interest rates, and higher than a 5% ten year. So they’re going to they’re going to have a report in some discussion of that.
Must pay attention/higher debt levels raise risk 00:20:55:02
And then they’ll, as they do, I think quarterly, they’ll have a formal financial stability evaluation presented to the committee. And, you know, I don’t see a dramatic sudden financial crisis coming, but I am paying attention to what the markets are doing, because it could be the early stages of something that has a big effect on the debt position of the United States.
Credible Fed could bring long rates down/a silver lining rate hike 00:22:26:17
Well, the Fed, you know, doesn’t set long term rates. No can but can influence them with the direction that the short-term rates are going and particularly the policy rate which is the overnight rate. So, I would think that a hike at this meeting would have some softening effect on long-term rates. Also, there’s an inflation premium in the in among the forces that are causing this rise in long term rates, a credible Fed that is committed to bringing the inflation rate down could have a positive effect in lowering those long term rates. What you might even see coming out of this meeting, this would be a short term phenomenon. But what you might very well see is there’s a rate hike 25 or 50 basis points, and the long rates don’t respond accordingly. They, they, they actually either stay stable or even come down a little bit taking in that information that the fed is serious about its inflation objective.
Much of what affects markets is not under Fed control 00:23:39:01
So that’s what the Fed can do. The Fed cannot do very much, quite frankly, about the other forces at work. The fiscal side of economic policy in the United States and the growing competition in the least in dollar markets between AI investment and debt, debt associated with that and U.S. Treasury financing of the deficit. That’s an interesting tug and pull that seems to be going on.
Both the Fed and Treasury matter to rates 00:24:16:11
I take the interventions <in markets/securities purchases> to try to bring down the longer-term rates, you know, as a sign of deep concern on the part of the Treasury. So, the Fed can affect inflation, and the Fed can conceivably have a positive effect, at least in the short term, on the trend in those long-term rates.
Dennis P. Lockhart-
President, Federal Reserve Bank of Atlanta, 2007 – 2017
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Dennis P. Lockhart became the fourteenth president and chief executive officer of the Federal Reserve Bank of Atlanta on March 1, 2007. He retired on February 28, 2017.
Lockhart was born in Bakersfield, California. He attended Stanford University and earned a bachelor’s degree in political science and economics in 1968. In 1971, he earned a master’s degree in international economics and American foreign policy from the Johns Hopkins University School of Advanced International Studies. He also attended the Senior Executive Program at MIT’s Sloan School of Management in 1994. He served as an officer in the US Marine Corps Reserve from 1968 to 1974.
Lockhart started his career with Citicorp/Citibank (now Citigroup). From 1971 to 1978, he held various international positions in Saudi Arabia, Greece, and Iran. From 1978 to 1986, he was senior corporate officer of the Southeast office of Citibank in Atlanta. From 1987 to 1988, Lockhart was head of the firm’s Latin American debt-to-equity swap investment program, designed to restructure sovereign debt.
From 1988 to 2001, Lockhart worked at Heller Financial, where he served as president of Heller International Group, which had activities in commercial banking, finance and merchant banking in North and South America, Europe and Asia. From 2001 to 2003, he was managing partner at Zephyr Management LP, a private equity firm based in New York with activity in Africa and Latin America.From 2003 to 2007, Lockhart served on the faculty of Georgetown University’s Walsh School of Foreign Service, teaching in the master’s program. In this role, he was chairman of the program’s concentrations in international business-government relations and global commerce and finance. He also was an adjunct professor at Johns Hopkins University’s Nitze School of Advanced International Studies.
Before joining the Atlanta Fed, Lockhart served as a member of the boards of directors of several companies, including CapitalSource Inc., Tri-Valley Corp., and Greenfield Holdings Credit Ltd. He was also chairman of the Small Enterprise Assistance Funds. He served on the Advisory Committee of the US Export-Import Bank and chaired the committee in 2000.
Currently, Lockhart serves on the board of directors of the Metro Atlanta Chamber of Commerce and St. Joseph’s Health System. He is a trustee of Agnes Scott College and the Atlanta International School. He also chairs the World Affairs Council of Atlanta and the Midtown Alliance.
During Lockhart’s tenure, the Federal Reserve faced some of the most traumatic economic events since the Great Depression of the 1930s, including the financial crisis and Great Recession. Lockhart has given many speeches on the financial crisis, monetary policy, and the economy.
Under Lockhart’s stewardship, the Atlanta Fed won several awards. It was voted one of America’s Top Workplaces by Workplace Dynamics in 2013. In 2012 the Atlanta Journal-Constitution ranked the Atlanta Fed number nine in the large-company category as one of the top workplaces in Atlanta.