Atlanta Fed's Lockhart Shares Framework for Liftoff

Dennis Lockhart

Although recent data on the economy have been mostly positive, it's still too early for policymakers to "drop the gavel and declare the case closed,” Atlanta Fed President Dennis Lockhart said recently.

That's in part because he's not yet convinced that price stability and maximum employment—the Federal Open Market Committee's (FOMC) dual objectives—are firmly in sight, he noted recently at the Sixth Annual Rocky Mountain Economic Summit in Jackson Hole, Wyoming. Indeed, economic conditions will likely warrant near–zero short–term interest rates until the second half of 2015, he said.

Liftoff tied to achievement of dual mandate
Liftoff—or the decision to raise the federal funds rate—depends on how close the FOMC is to achieving those goals. "This is not to say the Committee must or should wait until those objectives have been fully and unarguably achieved,” Lockhart explained. "Rather, I think we will be in the zone of liftoff decision making when the outlook for accomplishment of the two objectives suggests they are in sight,” he added.

Determining progress toward price stability and full employment is not exactly straightforward, however. For example, the true path of inflation is often obscured by month–to–month or quarter–to–quarter fluctuations in the data, as well as occasional shocks that may cause temporary changes in the numbers.

Lockhart welcomed the recent firming of inflation data but noted that it's not evidence enough that price stability is imminent. For one, inflation rarely occurs in isolation. "We should be seeing other indicators of the absorption of economic slack," especially wage growth, he said.

Defining maximum employment is also a challenge, in part because the official unemployment rate does not account for concerning phenomena such as the drop in prime–age participation in the labor force or the elevated number of people working part–time for economic reasons.

The bottom line is that "the FOMC is still somewhat short of the point where achievement of the two objectives is confidently ‘in sight,'” he said.

Lockhart monitoring risks on horizon

As Fed policymakers consider when to raise rates, Lockhart said he's keeping an eye on two potential risks in particular—a prolonged overshooting of the FOMC's 2 percent inflation goal and financial system instability. Although remaining watchful, he is not overly concerned about either risk, he said.

Lockhart also cautioned against acting too soon in the face of recent strong data on the economy. "It will take some time to validate an outlook that assumes above–trend growth and associated solid gains in employment and price stability, he said. "I'm sticking to the view that conditions that would justify a liftoff decision will arrive in the second half of next year."

July 28, 2014