In an interview with The Washington Post, Atlanta Fed President Dennis Lockhart blamed much of the disappointing data this year on a brutal winter that kept half the country covered in snow into March. He said the weather has not only curtailed hiring, but also likely depressed economic growth in the first quarter. Still, he cautioned that it could take several months of stronger data once warmer weather arrives to be sure the recovery has not hit the skids.
“When you’re in the middle of something, you don’t know exactly what you’re dealing with,” Lockhart said.
The Fed has been scaling back the amount of money it is pumping into the economy. It is now buying $65 billion in Treasurys and mortgage-backed securities a month, down from $85 billion a month in 2013. Central bank officials are slated to meet twice more during the first half of the year. If they trim purchases by $10 billion each time, as many analysts expect, the program will be half of its original size before there is enough information to warrant changing course, Lockhart said.
But Lockhart said he does not believe a shift in strategy will be necessary. He reaffirmed his prediction Thursday that the economy will expand roughly 3 percent over the year but said that small fluctuations in data were tolerable.
“The variability that comes sort of normally from quarter to quarter or month to month is not likely in my mind to justify a change,” he said. “It would have to be fairly material.”
Lockhart said that he expects the Fed to begin raising its target for short-term interest rates, which has been at zero for five years, in the second half of 2015. He predicted that the unemployment rate would be about 6 percent at that time but hoped to de-emphasize the indicator as a guidepost for monetary policy.
The Fed had promised to keep rates at zero as long as the jobless rate was above 6.5 percent. But the unemployment rate has fallen faster than officials expected, partly driven by discouraged jobseekers leaving the labor force. In addition, many people who are working part-time would prefer full-time work.
“Full employment is when we absorb people who are in the shadow labor force,” he said.
That means that decline in the jobless rate may overstate the health of the labor market, Lockhart said. He said the Fed should use more qualitative language to communicate not only when it will begin to raise interest rates but how it will address subsequent hikes.
Lockhart’s remarks suggest the Fed is increasingly likely to scrap its 6.5 percent threshold for the unemployment rate when officials meet in Washington later this month. The Fed could also discard its 2.5 percent threshold for inflation, but Lockhart said that number “creates a tolerance range” for inflation that he believes still applies.
Lockhart is slated to speak tonight at Georgetown University, where he taught for four years before taking the helm at the Atlanta Fed in 2007.