Atlanta Fed President Dennis Lockhart met Saturday with Wall
Street Journal reporters Jon Hilsenrath and Harriet Torry on the
sidelines of the Kansas City Fed's research symposium in Jackson
Hole, Wyo.
Mr. Lockhart was fairly upbeat on the economy, said he's ready
to talk about raising interest rates in September, and strongly
discouraged the idea that the Fed is considering pushing rates into
negative territory.
Here is a transcript of the interview, lightly edited for
clarity and length.
MR. HILSENRATH: Dennis Lockhart, president of the Federal
Reserve Bank of Atlanta. We're here in Jackson Hole, talking about
the economy. So give us your read: How is the U.S. economy doing
right now?
MR. LOCKHART: I think the U.S. economy is expanding at a modest
pace. The second quarter (gross domestic product) number -- which
was 1.1 (percent annual rate of growth), just revised slightly
yesterday -- I think overstates the slowdown or a slowdown. We have
been looking through that number to an account in the GDP accounts
called real final sales, which is GDP less inventory.
And what we see there is a better picture and a more consistent
picture over the last few quarters. So I think the economy is
chugging along, and I'm not one who is interpreting the headline
GDP number as somehow suggesting that we have slowed from what was
already a slow expansion.
MR. HILSENRATH: Right. So your view has shifted a little bit
from a few months ago, when there were a lot of reservations about
Brexit and weak jobs numbers?
MR. LOCKHART: Well, we certainly had a lot of risk elements in
the air a few months ago. And when you go all the way back to the
beginning of the year, you had a lot of things related to China --
the Chinese equity markets, the Chinese slowdown spilling over to
emerging markets -- and then later there was the buildup to Brexit.
I think we're past those things, and the overall global risk
environment is a bit more settled in my opinion. So I think really,
for me, the focus is on the domestic economy.
MR. HILSENRATH: So you're ready to raise interest rates,
then?
MR. LOCKHART: I'm ready to talk about it.
MR. HILSENRATH: Right. Tell us what you're thinking? How close
are you to being at a level of comfort where you would be ready to
pull the trigger on another little move?
MR. LOCKHART: What I have been saying, and I'll say it to you
again, is that, knowing what I know today, if the economy in the
next few weeks performs consistent with my sense of the economy,
then I think we ought to have a serious discussion at the September
meeting. So I, in no way, rule out September and look to December
or look to even the November meeting. But I am not going so far as
to say I think we should do it. I want to see what the next jobs
report is. I want to make sure the -- whatever data we have coming
in are consistent with that view. But then I think we should
discuss it there.
MR. HILSENRATH: So Stan Fischer was out speaking on Friday and
suggested there might still be a possibility that the Fed raises
rates twice this year. Is that something --
MR. LOCKHART: Well, certainly the calendar would allow that. We
have three more meetings.
And I wouldn't take that position today, but I don't rule it out
as well. And I believe that we -- probably the conditions will be
satisfactory for at least one more.
MR. HILSENRATH: Right. So we will have gotten through 2016 with
just one interest rate increase.
MR. LOCKHART: In that scenario. In that scenario, yes.
MR. HILSENRATH: Is that the world we live in now, that we're
talking about one a year, given the very low neutral Fed-funds
rate, given the slow pace of growth and low inflation? Is that --
is that where we're going to be for the next few years?
MR. LOCKHART: I think the bywords are "cautious" and "gradual"
about this economy. And I think the dot plots and the (summary of
economic projections) of December that showed four increases was
really sort of unrealistic considering the state of the
economy.
MR. HILSENRATH: Right. Let's talk about negative interest rates.
That's a subject -- it's been a subject of conversation here at
this conference, except in the speech of Chair (Janet) Yellen, who
didn't even mention the idea. They're trying negative interest
rates in Europe. They're trying them in Japan. What's your view on
that as a policy tool? Is that a -- is that a tool that in an
emergency might be needed here in the United States?
MR. LOCKHART: I don't want to encourage the view that the
(Federal Open Market Committee) or the Fed is in any serious way
considering negative interest rates for this economy. I view it as
an interesting experiment that's going on elsewhere -- fortunately,
I think. We'll see what the consequences of negative interest rates
and the results that they produce -- we'll see what happens.
But I think we are discussing them -- discussing this policy at
this conference more in a theoretical sense. Clearly, you can go
beyond zero now. Some people have shown that. But to think of it as
something that is being readied for deployment in this economy in
the United States, I don't want to encourage that view.
MR. HILSENRATH: All right. Thanks very much, Dennis Lockhart. I
hope you get some hikes in at the conference today. Thank you very
much.
MR. LOCKHART: Thank you, Jon.
[ End part 1; begin part 2.]
MR. HILSENRATH: All right. So I just want to drill down a little
bit on this negative rates -- this negative rates question. What's
your assessment, having looked at the experiment in places like
Japan and Europe, about the costs and benefits?
MR. LOCKHART: Well, I'll make just two or three points. I'll
express concerns that would develop over a period of time.
One is real damage to the financial system through banks and
other intermediaries like life insurance companies or insurance
companies in general that depend upon fixed-income investments or
lending that is priced off of short-term interest rates. Even in
our low-rate environment in the United States, we are seeing some
of those institutions really express a lot of stress. Charlie Evans
and I met with a group of life insurance CEOs a few weeks ago, and
they have a broad range of concerns, but certainly their investment
earnings are under pressure because of low interest rates. When you
go to negative interest rates, you can -- in theory, at least, you
can really do some damage to some important industries. So that
concerns me.
Do I see any direct evidence of that yet? I think it's probably
too early.
MR. HILSENRATH: Can you tell me about the meeting you had with
these life insurance CEOs? How did that come about, that you and
Evans --
MR. LOCKHART: I have a -- I have a director who is a CEO of a
life insurance company headquartered in New Orleans, and he
basically orchestrated a meeting that his industry -- they want to
have a closer relationship for dialogue on various matters with the
Federal Reserve Banks and with the Fed in general, and so we
accommodated that request by having a meeting. And (Chicago Fed
President) Charlie Evans has a small unit in Chicago that has
analytically been following the insurance industry, so that's the
reason we had it in Chicago.
MR. HILSENRATH: So you invited Evans to come along?
MR. LOCKHART: You know, well, actually, it was his -- one of his
people who organized everything, so it was -- in a way, I started
it and then it grew out of Chicago, and then I was invited to it as
well.
But my point, simply, is there could be institutional damage
over time with negative interest rates, and it bears watching in
Europe and Japan.
MR. HILSENRATH: How are the life insurers responding?
MR. LOCKHART: They didn't go into great detail about their
investment strategies. They just wanted to stress the importance of
the life insurance industry to society, and they also wanted to
show us how important they are to the various districts of the
Reserve banks via investment in commercial real estate and
employment and such. But my overall point is that I would be
concerned about institutional damage or damage to industries if you
had a really prolonged period of negative interest rates.
The search for yield is a theme that we've been living with for
quite some time, obviously -- for literally years. But the drumbeat
that I pick up largely from just coverage of different financial
market developments, that drumbeat seems to be getting stronger.
And I took note recently of coverage in your newspaper, I believe,
of the dynamic of Japanese institutions selling off in the bond
market in Japan, buying dollars, and investing in U.S. Treasurys
for yield on a hedged basis. And the -- and the lesson I took from
that is that are some fairly complex patterns of capital flows that
are arguably caused by negative interest rate environments in one
country, where we're seeing it influence interest rates in our
country.
And so that, too, bears watching: What are the consequences for
our capital markets for dollar rates because of negative interest
rates abroad?
MR. HILSENRATH: Right.
MR. LOCKHART: And that's independent of this question of policy
divergence. This is just market effects that occur. So I think it
-- we have to be monitoring that as well.
MR. HILSENRATH: So are you concerned that that's exacerbating
the reach-for-yield phenomenon here, negative rates in --
MR. LOCKHART: Well, certainly that would be a logical
conclusion, because if the capital flows are influencing
longer-term risk -- relatively risk-free Treasury rates and such in
the U.S., then it just makes the yield environment more difficult
for investors here.
MR. HILSENRATH: And, on the ground, where are you seeing this
show up? You mentioned commercial real estate. Are there any
particular markets that you're concerned about or growing
concerned?
MR. LOCKHART: We're monitoring commercial real estate with some
intensity right now because cap rates are extremely low.
Valuations, particularly of top-quality properties in major
markets, are very aggressive. And commercial real estate is one
area where, in our supervisory responsibilities, the banks we
supervise have some exposure.
MR. HILSENRATH: Do you see much happening at the Board (of
Governors) on this front, too?
MR. LOCKHART: The Board basically sets the policy and makes the
final decisions on what we are focused on and we then implement.
So, yeah, it's the back-and-forth between the Board and the Reserve
Banks on --
MR. HILSENRATH: And has this intensified in the last few months?
I mean, my sense was there was -- there was a fair amount of worry
back in the end of last year, and that it dissipated a little bit
in the first half as markets unraveled to some extent.
MR. LOCKHART: I think simply the focus on commercial real estate
exposure has become sort of more routine in the last year or
so.
MR. HILSENRATH: [ inaudible] -- the exams.
MR. LOCKHART: Not that -- not that -- not that there's been a
backing off of focus on it or backing off of attention, but more
it's become a routinized part of the process of supervision.
MR. HILSENRATH: Yeah. And so does it come up in specific ways in
the regular exam process that you implement?
MR. LOCKHART: Well, when the supervisor is scoping an exam,
they're going to focus on what they think are the riskiest area of
a portfolio.
MR. HILSENRATH: Right, so they're asking more --
MR. LOCKHART: So, clearly we're looking at commercial real
estate.
MR. HILSENRATH: Examiners are just asking more questions about
it.
MR. LOCKHART: I can't -- you know, I don't know what happens
exactly but I can just tell you it's part of the agenda.
MR. HILSENRATH: Right, right. So it seems like there's a
disconnect between the theorists here and the practitioners. So as
a -- as a non -- on this question of negative rates, as a
non-economist, what do you think it -- these eggheads are saying
that -- who say that, you know, in a model this is the way you
--
MR. LOCKHART: [ laughs] I'm not going to repeat the
characterization of my colleagues who gave the papers. Well, I
think what is not easy to theorize is what would be the -- and you
know how we use this expression -- the political economy reaction
to negative interest rates in this country, particularly if you
went as far as one of the papers are suggesting, that paper cash
currency would essentially be discounted. It would, you know, be
priced such that it's not worth its based value.
Now, if you went that far -- I'm no expert -- but my guess is,
there would be a complete uproar, and before we know it there'd be
at least legislation proposed to make it illegal to do that. So I
think, you know, in the real world you have to factor in the
politics of a question with -- whether from a pure economic theory
point of view it's going to work.
And that's what I think is the unknown in the negative interest
rate. But let me go back to the point I made in the earlier
interview. I don't want to be one who's encouraging anyone to
believe that this is a serious near or even medium-term prospect in
the United States. I just don't see it that way. So I think that
the discussion of negative interest rates is a -- perhaps an update
and revision of all the literature around the zero-lower bound and
an attempt to try to draw lessons from what we see going on
elsewhere in the world.
MR. HILSENRATH: Right. Can we -- hey, I don't want to -- if
you've got other questions, I know you're --
MS. TORRY: No, no, no, please carry on.
MR. HILSENRATH: Oh, so you were talking outside also about the
fear factor. What do you have in mind when you talk -- when you do
mean? When you use fear factor, are you talking about central
bankers being afraid of confronting the political economy, or are
you talking about the public being --
MR. LOCKHART: No, no, I'm talking about the public just being --
finding -- in the United States, when the question comes up and I
get the question from public audiences after a speech. Someone will
raise their hand and say, "What about negative interest rates?"
I've been careful to try to discourage any view that there's a
serious prospect of negative rates in our economy in this -- in our
country. But starting early this year -- I would say in January --
there was enough discussion of it that it's on the minds -- as a
policy possibility on the minds of the people in the public, and I
think they worry about not only the policy per se, but what's the
state of the world that would create that policy.
MS. TORRY: Do you think that is a more significant -- would that
have more of an impact on the economy than the real -- than the
negative interest rates themselves, that fear factor, you
think?
MR. LOCKHART: I don't know. I mean, I'd have to get someone to
think through that question carefully. In other words, you're
saying that the fear factor might change consumption patterns or
savings patterns or something like that, conceivably.
MS. TORRY: I mean, I think in Germany and some other countries
with negative rates, savings rates have actually increased, which
is just so counterintuitive.
MR. LOCKHART: I don't rule out that there can be some very
counterintuitive results have come out. So -- but that's why I
guess I'll just stress that I am treating this as an experiment
that we have the luxury to watch from a distance.
(END) Dow Jones Newswires
August 27, 2016 14:07 ET (18:07 GMT)
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