By Jon Hilsenrath
The economy is ready for the first increase in short-term
interest rates in nearly seven years and it would take a
significant deterioration in upcoming data to convince him not to
move in September, Federal Reserve Bank of Atlanta President Dennis
Lockhart said in an exclusive interview with The Wall Street
Journal.
The comments, signaling the possibility of a rate increase
nearing, sent stock prices lower and yields on U.S. Treasury notes
up.
Below are excerpts of some key passages from the interview. A
fuller transcript, with additional comments on Mr. Lockhart's
evolving economic forecasts, his views on froth in the commercial
real estate sector and investigations into leaks at the Fed, will
follow at a later date.
WSJ: How do you see the economy progressing now relative to the
thresholds you set out in an April speech?
LOCKHART: Grounded in the dual mandate, the employment picture I
would say continues to improve satisfactorily and the inflation
picture obviously remains below target and affected at a headline
level by continuing change in oil prices that play through to
gasoline prices. I would say the inflation picture will be hard to
read in the coming weeks, perhaps months. Therefore the conclusion
that I will have to draw--and any individual participant on the
[Federal Open Market Committee] will have to draw--in terms of
being reasonably confident that inflation will converge in the
medium term back to target, is going to be more of a composite of
indirect evidence or indirect indicators than being satisfied with
the direct evidence on inflation.
Having said that, one of the ways I go about evaluating
inflation--I obviously like everyone else look at the 12-month
number. Then I look at the near-term, shorter-horizon numbers. The
three-month number gives me more of a sense of a run rate, the six
month number has some of those benefits as well. Some of the
shorter-horizon inflation numbers in the [personal consumption
expenditures[ price index seem to be firming relative to the longer
horizon. I take some courage from that.
WSJ: Courage?
LOCKHART: I take some solace from that, some confidence from
that. But I do think that inflation will be difficult to read in
the near term. I'm probably going to rely as I think about the
question of reasonable confidence more on a total picture and some
indirect indicators.
WSJ: In April you talked about wanting to see no regression in
the economy.
LOCKHART: I'm not seeing any significant indication that we are
losing ground or that we are in some way falling off the basic
track that I have been describing for quite some time. In that
sense I think the economy is performing at a quite satisfactory
level.
WSJ: And so we are this kind of fuzzy middle for you.
LOCKHART: We are in a fuzzy middle if you want to use that term,
because there has not been a clear breakout of wage acceleration;
there has not been a lot of clarity around the inflation forecast;
and growth is in the moderate range of 2% to 2.5% or 2.75%, but not
right up against the 3% we were hoping would be the case in
2015.
WSJ: Where do indirect indicators lead you at this point in
terms of your confidence level on inflation and the progress you're
seeing on jobs?
LOCKHART: We're getting positive signals from the employment
numbers. The second-quarter growth numbers, 2.3%, very close to
what we here had forecast using our tracking estimate. Certainly I
take that as a rebound from the weaker first quarter. The first
quarter was stronger than we had previously thought. The first
estimate was contraction; then it was revised to slight contraction
and now it is revised to slight growth. But I take the second
quarter to have been a nice rebound from the first quarter and my
forecast for the third quarter and the fourth quarter is that they
will show some improvement over the second quarter. I think that is
a solid middle-range growth picture.
One of the key points I think is that in the absence of direct
evidence that inflation is in fact converging to the target and in
the absence of compelling or convincing direct evidence, I think a
policy maker has to act on the view that the basic relationship in
the Phillips curve between inflation and employment will assert
itself in a reasonable period of time as the economy tightens up,
as the resource picture in the economy tightens.
WSJ: How comfortable are you doing that?
LOCKHART: I am quite confident that that basic expectation will
materialize.
WSJ: You talked about wages a moment ago. We just got a really
soft employment cost index number. What do you make of that?
LOCKHART: The analysis I've seen is that the first quarter,
which to some extent was interpreted early on as evidence of
acceleration, really now appears to have been influenced by
incentive compensation-type job categories and that the great
majority of other vocations and other forms of employment were
relatively flat and then the weakness in the second quarter
certainly doesn't point to any evidence that we're seeing the
long-hoped-for acceleration. I have to conclude that the wage
picture is mixed and that we have not yet seen the acceleration
that we had hoped for and expected.
WSJ: So this decision really comes down to your confidence in a
model that Philips curve dynamics will assert themselves?
LOCKHART: Let me turn your question around a little bit. I think
there are going to be two principal considerations on the mind of
policy makers and then I will tell you where I come out on that at
this point. One is going to be the question of inflation. How do
you get to an honest view of being reasonably confident? That is
going to be one key thing that this policy maker has to struggle
with. The second issue is to what extent is one going to be
influenced by very near-term data. That data could be quite
positive and therefore encouraging, or the data could be mixed or
perhaps even some really disappointing numbers could come in. Those
I think are what most policy makers, my colleagues, will be
evaluating.
My own approach to that is to say is I think we have to put
significant weight on the accumulated progress we have seen quite
literally over a number of years, but certainly since the first of
the year, and not be overly influenced by the gyrations that so
often occur in month-to-month data. That is not to say that you
ignore the evidence that is most proximate to the date of having to
make a decision, but I won't be overly influenced by just the
latest thing I've heard on the economy. I do think this is a time
to try to take a pretty broad perspective, a pretty long horizon
perspective to where the economy is relative to where it was and
whether a policy rate at zero continues to be appropriate for the
circumstances.
We have talked already for a bit about getting to reasonable
confidence. It is going to be a synthesis of a variety of things. I
don't know if I would quite say that I am resting everything on a
model, but I am certainly prepared to get comfortable based on
expectation that seems to me to have compelling logic.
WSJ: Given the cumulative evidence that you've seen, do you
think you'll be ready to move in September?
LOCKHART: I want to sort of hold off on that. I have said
publicly before that I lean toward September and I am still very
open to a September move.
WSJ: What does it come down to for you? Given that you are
focused on cumulative evidence and don't want to put too much
weight on the last month of data. What are you going to be
assessing over the next two months to make up your mind?
LOCKHART: This touches on what we talked about earlier when we
talked about the April speech. One framework that I will be using
will be looking for any indication in the economic data that
undermines my basic belief about the track of the economy. If you
want to call that negative evidence or evidence that casts doubt I
will be looking closely at all evidence that we see in the data for
indications that my basic assumptions are wrong or should be
doubted. That is like a negative test in some ways. That is going
to be one of the principal ways I will go about judging the
question of whether liftoff in September is appropriate or not. To
interpret that, that means I think there is a high bar right now to
not acting, speaking for myself. It will take a significant
deterioration in the economic picture for me to be disinclined to
move ahead.
WSJ: Why do you think that will be the time. Why do you think
have we gotten to a point where you are ready to take this historic
step?
LOCKHART: I am of the belief that if we were to roll the film
forward and then look back one quarter or one meeting here or there
isn't going to make a significant difference to the economy. I
don't think it would be a big policy error to wait somewhat longer.
I'm not one to quibble over one meeting or so. But I do think we
are close. The economy is in a state of readiness for beginning
normalization. I do want to emphasize, what you have heard from
many people, including Chair Yellen, that the process of interest
rate normalization is going to be a gradual process so we will
continue to have quite accommodative policy for quite some time. I
add all that up and say, you know, my priors going into the meeting
as of today are that the economy is ready and it is an appropriate
time to make a change.
WSJ: Some people have raised the idea maybe you signal it in
September and then wait until October to act. Do you want to get
into this pattern of signaling, waiting and then moving?
LOCKHART: I am one who very strongly would like to avoid
unnecessary market volatility around the announcement of liftoff.
But we have put a stake on the grounds that we are going to make a
decision based on the data. It is data-dependent. That makes it
much more difficult to signal because that suggests that the data,
right up to the meeting, all is taken into consideration. That
makes it difficult to make a decision a meeting in advance and then
somehow signal it. You can make small gestures of signal. I would
say that the inclusion of the word "some" in our statement is that
kind of small indication of leaning in a particular direction
without completely signaling certitude or eliminating any
optionality.
WSJ: Tell me about that word "some." Did you all spend a lot of
time talking about that four-letter word?
LOCKHART: Some time. Since it was a change from the previous
statement there had to be discussion of whether people wanted it in
or didn't want it in. There was some time devoted to discussing it.
I interpreted it as meaning a bit more or a little bit more. That
is a qualifier that conveys to the public that we're getting
closer.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com