MNI INTERVIEW: Chances Rise Fed On Hold Through 2026 -Lockhart

The chances are rising that the Federal Reserve will end up leaving interest rates on hold the rest of the year, with tariffs and the Iran war threatening to upend its base case of gradual disinflation and with the U.S. economy and labor market in reasonably healthy and stable shape, former Atlanta Fed President Dennis Lockhart told MNI.

"I see the chances of no move this year as now a bit greater than 50%," Lockhart said in an interview. "We're in a much more 'could go either way' kind of situation than we began the year." 

Cuts are delayed while the FOMC wrestles with whether the war has fundamentally altered the inflation outlook, but, while a hike is possible, it is not the base case for the committee, Lockhart said. 

"The prevailing view is that the current setting of the policy rate is to a slight degree restrictive. And therefore I think the committee would probably be wary of a pre-emptive hike," he said, adding that because much of the inflation pressure is supply-side, tighter policy would blunt demand without actually solving the problem.

KEEPING GUIDANCE 

The oil shock continues to spread through the economy, as prices of fertilizer, helium, building materials and much else are all linked to higher energy costs, Lockhart noted. That complicates the matter for a committee already grappling with elevated inflation. The Fed has missed its 2% target for some six years.

"Energy is embedded in practically everything in the price index," he said. "There's a first-order effect, which is gasoline prices, but then there are second, third and fourth-order effects."

At its last meeting, the FOMC was split on whether to shift to "two-sided guidance" -- signaling that the next move could be either a hike or a cut -- but will likely land on not changing the statement again, he said. 

Hawkish members may argue that they need to protect the Fed's credibility by signaling preparedness to act relatively soon. However, doing so in the final days of Chair Jerome Powell's tenure could be misinterpreted, with any signal pointing toward higher rates potentially read as a pre-emptive attempt to box in Kevin Warsh, Trump's nominee to lead the central bank, who has publicly called for lower rates, Lockhart said.

"Signaling a possibility at this juncture of a policy rate hike might be provocative," and Powell would resist any move that could be perceived as prejudging his successor's agenda, Lockhart said. "He's going to insist on the Fed being apolitical."

TESTIMONY TAKEAWAYS

On Warsh, Lockhart struck a cautiously optimistic tone, predicting the nominee would assert his independence once confirmed regardless of what was or wasn't said in private meetings with the White House. 

His Senate testimony was a "tightrope walk" that managed not to antagonize President Donald Trump or lawmakers seeking assurances regarding his independence, Lockhart said. "He navigated all the conflicting pressures as best he could."

Warsh offered some hints of the institutional approach he will advocate once he is Fed chair -- communicate less, reform the dots process and generally offer less guidance and shrink the balance sheet, Lockhart said. 

"But it should be repeated that the chair cannot dictate policy actions. The chair leads a process that gets to a decision, even while the reasons members support that decision can be quite varied. The chair is less a lone actor than a herder."