Central Banks

Thursday, November 19, 2015 - 14:31

Atlanta Fed's Lockhart: Gradual Means No Hike at Every Meeting


--Communication Post-Meeting 'Measured Enough' if FOMC Doesn't Want Dec Liftoff
--ON RRP Levels Needed at Liftoff Yet to Be Determined, 2nd Statement Possible
--'Next Meeting' in Oct Statement Achieved Obj of Getting Mkt Pricing to 50/50

ATLANTA (MNI) - When asked what the Federal Reserve means when it promises interest rate hikes will be gradual, Atlanta Federal Reserve Bank President Dennis Lockhart said Thursday it means the Fed won't raise rates at every meeting.

"Beyond that, it's difficult to predict what that will look like exactly," Lockhart told reporters following a speech at the DeKalb Chamber of Commerce. "It is possible we will end up in period where the economy justifies (a rate hike at) every meeting, but I would define gradual as 'not every meeting.'"

Lockhart, a voter this year on the policymaking Federal Open Market Committee, reiterated the stance that rate hikes will be data dependent, though he said such as assertion "doesn't preclude pauses from time-to-time to evaluate whether the policy is well positioned relative to what we are seeing in the data."

The FOMC is beginning to stress the path of rate increases following the initial hike off the zero lower bound where it has been since December 2008. But liftoff still remains a focus for markets and debate continues over whether the committee will move at its next meeting in December.

The committee, in the statement following the October meeting, added a reference to its "next meeting." The minutes of that meeting, released Wednesday, said "Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting."

Lockhart added Thursday: "Going into the meeting, I felt it was a reasonable objective to get the market pricing of the probability of a December decision closer to 50/50. Well, we actually we have overshot that, so the probabilities are higher."

The market probability of a December rate hike is closer to 65% today. But, Lockhart said, "I think the decision ... to try and get the optionality of 'go' or 'no go' in December as roughly balanced was the right thing to do, and I think we achieved that."

Still the added language does not commit the Fed to moving before the end of the year, he said. "I think the communication so far has been measured enough that I wouldn't take it so far as to say it would constitute a shock" if the FOMC doesn't raise rates then, Lockhart said.

As for what the communication will include when the FOMC does initially raise rates, Lockhart said, "at a minimum we would talk in terms of a new range, and then implicitly that range, at the top end, would have the (interest on excess reserves) rate as the cap, or the top, and would be supported below that, possibly, at the bottom of the range by the overnight reverse repo rate."

But, he added, "at this time, I can't really anticipate what such a statement would look like."

Lockhart also said, to the best of his knowledge, the committee is still considering what he called "a supplemental document" to communicate details of liftoff "because there are technical considerations that need to be conveyed on how this is going to work."

One way rate hikes are expected to work going forward is with the overnight reverse repo facility set at a rate at the lower bound of the fed funds rate. But what amount is needed in ON RRPs in order to lift the fed funds rate "remains to be determined," Lockhart said.

"I think the committee has conveyed simply the notion is that the ON RRP facility will be used in the early stages of a post-liftoff period to ensure we have good monetary control, but will not be a permanent facility," he said. "And the scale of it, I think, will be determined as we get closer to that decision."

Lockhart also weighed in on the Fed Oversight Modernization and Reform Act, or FORM Act, which passed the U.S. House of Representatives earlier in the day. This would require the Federal Reserve to follow a set monetary policy rule, as well as require a review of that policy by the Government Accountability Office.

Lockhart said he has "been supportive of a Taylor like framework once we get off of zero, but that is quite different than specifying a particular rule and then explaining every deviation from the rule, which I just don't think is a sensible approach to setting policy."

Also in the minutes Wednesday, the FOMC discussed the so called equilibrium real interest rate, which they expected to rise only gradually with stronger economic growth due in part to slower population growth.

"I would say there was quite widespread acceptance that the equilibrium rate likely varies over time," Lockhart said. "So it may very well gradually itself move up."

But it "does suggest that the scope of movement in the policy rate in response to an economic shock may be more limited under those circumstances than when the equilibrium rate was believed to be higher."

In prepared remarks, Lockhart repeated remarks made Wednesday to the Clearing House annual meeting in New York in which he said "I'm comfortable with moving off zero soon, conditioned on no market deterioration in economic conditions."

"Given my reading of current conditions and my outlook views," he said, "I believe it will soon be appropriate to begin a new policy phase."

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@mni-news.com

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