MNI INTERVIEW: Fed In Watch Mode Through 1H, Lockhart Says

The Federal Reserve is likely to hold interest rates steady through the first half of the year, adopting a stance of "watchful vigilance" amid a stable labor market and lingering inflation concerns, former Atlanta Fed President Dennis Lockhart told MNI.

"Looking at the momentum in the economy, the employment trend, the inflation picture, my guess is rates are on hold through the first half, essentially through the end of Powell's term," he said in an interview. "Policy is well positioned. It’s a very good time to be in a watchful vigilance mode." 

Lockhart also said the bar for Fed intervention — such as quantitative easing to prop up Treasury markets in a hypothetical crisis of investors fleeing American assets — remains high. 

The Fed is primarily concerned with "Main Street, not Wall Street," he said, and would normally intervene only if financial market turbulence threatened the broad economy. 

Continued tariff threats and spillovers from Japan's bond sell-off could continue to drive up long-term U.S. rates, but "market volatility comes and goes. For the Fed to act, they would have to conclude this market volatility will harm the employment side of their mandate." 

LINGERING INFLATION

The two catalysts that would prompt the FOMC to resume rate cuts are an unraveling of labor market conditions or further declining inflation without a serious deterioration in employment, which will take time to play out, Lockhart said. (See MNI INTERVIEW: Fed Strategy Shift Delays Price Progress-Koenig)

"If inflation starts to come down, they may move toward r-star, which most members believe is below the current policy setting." 

The center of the FOMC saw zero to three cuts this year, with a median of one cut. The fed funds rate target range is currently set at 3.5%-3.75%.

Whether growth sustains its impressive strength through this year and generates additional price pressures "is one more element that deserves to be observed for a few months," Lockhart said, adding the tariffs pass-through effect remains a risk as companies exhaust last year’s coping mechanisms like frontloading orders, absorbing tariff costs, adjustments to supply chain arrangements and other temporary measures.

"We could see another two to three months of inflation sticky around 2.7%. Then as the year unfolds, we’ll know whether the assumptions that tariff effects will fade were correct." (See MNI: Musalem Warns Easy Fed Policy 'Unadvisable')