By Jon Hilsenrath
Federal Reserve Bank of Atlanta President Dennis Lockhart said
the economy is ready for the first increase in short-term interest
rates in more than nine years and it would take a significant
deterioration in the data to convince him not to move in
September.
"I think there is a high bar right now to not acting, speaking
for myself," Mr. Lockhart said in an interview with The Wall Street
Journal.
He is among the first officials to speak publicly since the
Fed's policy meeting last week, at which the central bank dropped
new hints that a rate increase is coming closer into view, a point
he sought to underscore.
Mr. Lockhart is watched closely in financial markets because he
tends to be a centrist among Fed officials who moves with the
central bank's consensus, unlike those who stake out harder
positions for or against changing interest rates. His comments are
among the clearest signals yet that Fed officials are seriously
considering a rate increase in September.
"It will take a significant deterioration in the economic
picture for me to be disinclined to move ahead," he said at a
conference table in a room adjacent to his Atlanta office.
His comments follow those of James Bullard, president of the St.
Louis Fed, who said in an interview with the Journal on Friday, "we
are in good shape" for a rate increase in September.
The Fed has held its benchmark federal-funds rate near zero
since December 2008 to try to spur borrowing, spending and
investment. Most central bank officials, including Chairwoman Janet
Yellen, have indicated they expect to start raising the rate this
year, but they haven't decided as a group on when to start.
In weighing when to move, Mr. Lockhart said he was looking at
the economy's cumulative progress over many months, particularly on
the job front.
"We're getting positive signals from the employment numbers," he
said.
The unemployment rate fell to 5.3% in June, well below the
recent high of 10% in 2009. Job gains have averaged 208,000 a month
this year, compared with 260,000 a month last year.
Moreover, he added, the economy appears to have snapped back
from a growth slowdown in the first quarter. "I take the second
quarter to have been a nice rebound from the first quarter and my
forecast for the third quarter and the fourth quarter is that they
will show some improvement over the second quarter."
Hoping to take a longer-term view of economic developments, he
added that he wasn't inclined to put too much weight on new data
that emerges in the next few weeks unless it is especially
weak.
"My priors going into the [September] meeting as of today are
that the economy is ready and it is an appropriate time to make a
change," he said.
The main catch for the central bank, Mr. Lockhart said, is that
he sees little direct evidence inflation is rising toward the Fed's
2% target after running below it for 38 straight months.
Inflation could be held down in the weeks and months ahead
because of continued downward pressure on oil prices, he said.
Moreover the Fed hasn't seen the breakout in wages it had hoped to
see.
The central bank has said it will raise rates once officials
become "reasonably confident" that inflation is on a path toward
its goal. Mr. Lockhart said he had grown more confident inflation
will pick up mainly because slack in the labor market and broader
economy is diminishing.
Mr. Lockhart associated the interplay between economic slack and
the inflation rate with the late economist A.W. Phillips, who put
numbers to the idea that as unemployment rises or falls, wages and
thus inflation move in the opposite direction.
Some economists question whether this relationship has held up
over time, but Mr. Lockhart said he is putting weight on it.
"I think a policy maker has to act on the view that the basic
relationship in the Phillips curve between inflation and employment
will assert itself in a reasonable period of time as the economy
tightens up, as the resource picture in the economy tightens," Mr.
Lockhart said. By that he meant that as unemployment falls further,
inflation should start rising.
"I am quite confident that that basic expectation will develop
or will materialize." The logic, he added, was "compelling."
The Fed signaled in its policy statement last week that an
interest-rate increase was getting closer, Mr. Lockhart said. The
statement said officials wanted to see "some further improvement"
in the labor market before acting. It added the word "some" to the
statement, having said in earlier statements more broadly that it
wanted "further improvement." The addition of the word "some," he
said, was "a qualifier that conveys to the public that we're
getting closer."
The Fed has three more policy meetings this year. The next one
is Sept. 16-17, followed by meetings in October and December. Many
analysts expect a move in September. Investors have gone back and
forth in betting on whether the first move will occur in September
or December. Mr. Lockhart, like other Fed officials, said the
timing of the first move isn't so important, as long as investors
understand the Fed intends to move gradually once it starts.
"I don't think it would be a big policy error to wait somewhat
longer," he said. "I'm not one to quibble over one meeting or so.
But I do think we are close. The economy is in a state of readiness
for beginning normalization."
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com