While the Federal Reserve Bank of Atlanta forecasts a rise in interest rates in the last half of 2015, its President and Chief Executive Officer Dennis Lockhart said late Thursday he supports "continuing with a highly accommodative policy and deferring liftoff for a while longer."
The public wants to know the conditions under which tapering may be altered and when the first rate hike will be, Lockhart said in a lecture at Georgetown University, according to prepared text released by the Fed. "There is a high bar to reversing course, in my opinion," he said. "Unless the economy takes a major turn for the worse or a spell of intense disinflation develops, I expect the program to be completely wound down by the end of the year."
The question of "liftoff," when the target rate will be increased, Lockhart said, is "more salient" and will be determined by employment and inflation. With the unemployment rate near the 6.5% threshold set by the Federal Open Market Committee, "the time is approaching for a refreshed explanation of how unemployment or broader employment conditions are to be factored into a liftoff decision," Lockhart noted. "Defining full employment is a harder question than answering whether we are close to achieving such a state."
But while the unemployment rate may signal full employment is at hand, Lockhart said, "I think the current official unemployment rate may overstate the overall health of and progress achieved in employment conditions."
The drop in workforce participation complicates interpretation of the unemployment rate. The "shadow labor force," those who haven't looked for work even though they are capable of working, must return and be absorbed into the labor force before the country can reach full employment. "I do not think we're near that point yet," he said. "This is one of the reasons I support continuing with a highly accommodative policy and deferring liftoff for a while longer."
While Lockhart said he is optimistic about the economy rebounding after a sluggish beginning of the year, which has been blamed on weather, he noted "The alternative view, however, is that this quarter signals incipient renewed weakness-another false dawn. There is some ambiguity around the current state of the economy."
His optimism is based on stronger economic fundamentals and fewer headwinds.
