MNI INTERVIEW: Case For Dec Fed Cut Uncertain - Lockhart

The positive U.S. growth surprise and above-target inflation may discourage the Federal Reserve from lowering interest rates for a third straight meeting in December, former Atlanta Fed President Dennis Lockhart told MNI.  

"Many people are anticipating a third cut, and some are predicting an ongoing easing cycle. I’m not so sure that’s going to be the case when inflation is 100 basis points above target by some measures and arguably slightly deteriorating," he said in an interview. 

"At some point the committee members may feel they need to revert to inflation vigilantism." 

The insurance cuts in September and this week respond to the employment side of the Fed's mandate, but unless disinflation resumes next year, the committee may have to shift its attention to inflation, Lockhart said. Headline and core CPI added 0.3% and 0.2% respectively last month, both a tenth less than analysts had expected.

The committee continues to be divided on the ultimate effect of tariffs on price pressures, he said, adding that the milder-than-expected CPI print was encouraging but won't change minds. 

"We appear to be stuck at a 3% inflation world," he said. And with third-quarter growth estimated at 3.9%, according to the Atlanta Fed GDPNow measure, "perhaps it’s better to pause now, because that strength can be inflationary."  

By December, "some will argue two cuts have done enough to stabilize an employment picture that is not deteriorating rapidly," Lockhart said, "and it's sensible to begin addressing inflation again." (See MNI POLICY: Lingering Inflation Unease Tempers Fed Easing Push)

GOVERNMENT SHUTDOWN

With the extended federal government shutdown delaying key data, the Fed will assume the economy is going the way it has been while looking for signs that suggest otherwise. Officials will also rely more heavily on local Fed bank outreach efforts and private data sources, Lockhart said.

"They’re not flying completely blind," he said. "Business anecdotes and surveys are seen by reserve banks as closer to real time and, from time to time, more effective at identifying major turning points." 

Private employment indicators and the Beige Book so far suggest supply and demand for labor continue to fall in tandem, keeping the unemployment rate steady, while there's very little sign that consumption is in a recessionary trend, he said.  

"If I were on the committee, I would be asking myself: Am I seeing anything that suggests an adverse inflection point?" he said. 

"Certainly there are worrisome indicators out there that can cause concern about the assumption of continuity, but a fairly sanguine view of the current economy is appropriate at this time. There are no major evident cracks."