MNI INTERVIEW: Fed To Consider Hike in Sept - Lockhart

The Federal Reserve may be headed for a rate hike in September as the recent rebound in energy prices tips support toward tightening, former Atlanta Fed President Dennis Lockhart told MNI.

Cooler-than-expected June inflation readings have lessened the urgency to act this month, though June could well turn out to have been an anomaly at a time when renewed hostilities with Iran, fresh tariffs and enormous appetite for AI investments continue to add to price pressures, he said in an interview late last week before the U.S. paused strikes against Iran. 

"About half the committee favors attacking the inflation problem this year, and that number may have increased with the reversal of oil prices in recent days," he said in an interview. "That said, I think there's a view among the leadership of the FOMC that the committee can afford to wait." 

The long interval between the July and September meetings brings more data than usual to factor into a decision, while the upcoming Jackson Hole symposium also offers Chairman Kevin Warsh "an opportunity to set up a policy change if he so chooses," Lockhart said. 

The cutting cycles of the last two years began in September and ran through the rest of the year. Since the committee would likely not feel one hike is enough, that could happen again, he said. While in earlier periods the committee avoided a policy move on the eve of an election, recent cycles have shown the FOMC to be strictly data dependent and ready to act, he added.  

SURPRISE HIKE?

Though unlikely, a hike in July would follow rhetoric with action and be consistent with Warsh's strong pledge to restore price stability at his first press conference and testimony in Congress, Lockhart said. (See MNI POLICY: Fed Inclined To Hike Despite CPI Breathing Room)

But a real consideration under current circumstances is whether near-term hikes would have much effect on the pace of inflation, he said. A lot of current price pressure stems from supply-side factors, Lockhart said. 

"You have to ask the question whether a quarter or half a point on the fed funds rate would change anything considering the forces at work. Probably not," he said. 

The war with Iran could be protracted, and technology firms see AI as such a compelling opportunity that their investment is unlikely to be dialed back in reaction to slightly higher interest rate levels, he said.

For now, market yields on the two- and 10-year Treasury notes are effectively doing some of the central bank's tightening. 

"A hike might, on the margin, damp down consumer demand, but I don't think it would be decisive in causing disinflation to resume." (See MNI INTERVIEW: Fed Will Look Through Inflation And Hold -Miran)