Normalization Just Around the Corner?

Here’s a riddle: Who hasn’t done anything for six years but can still cause the Standard & Poor’s 500 Index to plummet based on just a few remarks to the press?

It’s those 17 rarified members of the Federal Open Market Committee (FOMC), meeting four times a year to decide, seemingly, to leave the nation’s policy rate at zero. 

One of those members, Atlanta Federal Reserve President Dennis Lockhart, spoke Sept. 22 to the Alabama World Affairs Council in Montgomery about the same time the Fed was being
chided for “confusion” that sent the
S&P tumbling.

“The Fed backed themselves into a corner last week by talking about China and emerging markets, ” Andrew Brenner, head of international fixed income for National Alliance Capital Markets, told Bloomberg. “The fact that they’re adding China and emerging markets into the mix and then still thinking about raising rates between now and the end of the year is very inconsistent.”

Lockhart, who took over the top job at the Atlanta Fed in 2007, told the Montgomery audience that monetary policy should be likened to steering an ocean liner, with turns of the wheel taking a long while to change the ship’s course.

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The volatility of the August stock market gave the FOMC pause, Lockhart allowed, combined with drops in China’s stock market and the devaluation of China’s currency.

Still, he expects the first Fed policy rate increase of the decade to occur this year, as Fed boss Janet Yellen has stated previously.

While interest rates are the usual headline, Lockhart said the Fed was also concerned about inflation, or rather, the lack of it.

“I know most of you are thinking, ‘What’s wrong with low inflation?’ but there’s a thing as inflation being too low, ” he said. Deflation, the expectation of prices going down in the near future, can cripple an economy.

“Central banks are pretty good at dealing with inflation. They’re not so sure in dealing with tools for deflation, which tends to be self-reinforcing. When 350 million Americans defer buying because prices might be cheaper tomorrow ‘the economy grinds to a halt, ’” Lockhart said.

Inflation stands now at 1.2 to 1.5 percent and the Fed aims for that measure to hit 2 percent by 2017.

As for “normalization” of monetary policy, as the Fed likes to call it, or “liftoff, ” as others like to call it, its time has come, Lockhart said. “The economy is showing moderate but solid growth and is performing solidly, ” he said.

Text by Dave Helms

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