Fed didn't have enough data on financial stability to 'override' monetary policy: Fmr. Fed president

Former President of the Federal Reserve Bank of Atlanta Dennis Lockhart joins the Live show to discuss why the FOMC decided to raise interest rates by 25 basis points.

Video Transcript

- Well, the Fed raising rates by another 25 basis points despite the worry that we've been talking about, the turmoil within the banking sector. JP Morgan's deal to buy First Republic earlier this week did little to calm investor jitters. And you're looking at the S&P Regional Banking ETF, KRE. Over the last two days, still off just about 7%.

For more on how this impacts Fed policy, we want to bring in Dennis Lockhart, former president of the Federal Reserve Bank of Atlanta. Now, Dennis, it's great to see you here. We just heard from Fed Chair Jay Powell. He made some comments about the banking sector, how he's viewing the stability of the banking sector at this point. Let's take a listen to what he had to say.

- Let me comment briefly on recent developments in the banking sector. Conditions in that sector have broadly improved since early March, and the US banking system is sound and resilient. We will continue to monitor conditions in the sector. We're committed to learning the right lessons from this episode and will work to prevent events like these from happening again.

- Work to prevent events like these from happening again. But Dennis, it was pretty optimistic in terms of where things stand, the stability within the banking system. What do you think? Do you agree?

DENNIS LOCKHART: Well, he certainly seemed reassuring. And I know from experience that the Fed has a lot of information, and they have a lot of people evaluating the current situation with banks. So I take some solace from what he had to say. At the same time, he's hardly going to get up and say, we are worried about the banking system. So he's got to walk a little bit of a tightrope.

But on that, I thought his comments were reassuring and probably will help keep things calm. I'm certainly hoping that's the case.

- Dennis, so yes, to your point, he's definitely not going to come out here and set off a fire alarm or anything like that. He generally speaks in a very measured tone. Was there anything that surprised you? Because I will say, for instance, myself observing this, you don't typically see the press conference start this way. He starts right into the monetary policy moves.

Today, he started with the regional banking sector and the issues there, acknowledging some of the shortfalls that had occurred with regard to rules and regulations that may be potentially coming down the pike. So was there anything surprising to you from today's press conference?

DENNIS LOCKHART: Well, I think it's noteworthy that he started with that because it's so front of mind. Everyone has-- particularly in the financial markets, everyone has this concern about the stability of the banking system and the potential for further runs on their mind. And so I think it was wise of him to step out first and address that particular issue. It's the gorilla in the room or whatever you want to call it.

So that was noteworthy. And then a little later, he said the three banks-- Silicon Valley Bank, Signature Bank, and First Republic-- do amount to a line in the situation that may have dealt with most of the problems. At least that's the way I interpreted that particular way of describing the situation.

- Dennis, what do you think about the Fed's decision to raise rates by 25 basis points? It was a unanimous decision. Was it the right decision?

DENNIS LOCKHART: Oh, I think it was the decision they had to make. As he pointed out very early in his comments, they're absolutely committed to bringing inflation down. We still have an inflation fight in front of us. They did not have enough information to let financial stability concerns override the monetary policy decision. And I'm not at all surprised that it was unanimous. So that, I think, is what happened at this meeting. You might have quite a different picture at the next meeting as they actually address whether or not credit contraction justifies some kind of a pause.

- And Dennis, I want to mention one other thing that was talked about today at the press conference-- the debt ceiling. Obviously, that is a fiscal feature, in other words. But Chairman Powell commented on it, saying that debt ceiling should be raised in a timely way. And obviously, failure to pay our bills would be unprecedented. This comes up every so often. What's your view on what's happening with regard to the debt limit?

DENNIS LOCKHART: Looks like Congress, particularly the Republican caucus in the House, is playing chicken with the administration on this. And I have observed these kinds of last-minute stories many times before as we've had similar situations arise. But this one does strike me as a little bit different, a little bit more dangerous, because the game of chicken, if you will, or the standoff, just seems to be a little bit more firm and more dug in.

And it makes me worry that we're going to have an accident of some kind in terms of a default-- perhaps not intended, but just because of the positions of the two sides, they can't get it resolved in time. And I think it's very, very worrisome. And Powell's tone on this is exactly right. We have to get this done and accomplished. And it should not be a matter of a great deal of bickering between Congress and the administration.

- Certainly did get many people's attention. We certainly saw the reaction right away within the market. Dennis, between now and the next meeting, we have about six weeks, so we're going to get two readings on the jobs market from the Labor Department. We have a number of readings on housing, a number of readings on inflation. What's the most important print that you will be watching for between now and the next meeting?

DENNIS LOCKHART: Well, I'll be watching the inflation print. I think that's obvious. Inflation is the front-and-center question that the Fed is dealing with. And the tone of those numbers, I think, will tell them a lot about whether they have to continue to lean against inflation by raising rates or whether they can, in fact, take a pause, perhaps for the summer, just to see how things develop.

The financial stability situation with the banks-- not a print, per se, not necessarily data, but certainly something that we have to watch, because I think you can't totally dismiss that there will be further stress with particular banks. And so you've got to watch that. That's sort of a wild card in this equation at this time. And it's certainly clear that the FOMC and the Fed are focused on it. So those are two things that come to mind in answer to your question.

- All right. Dennis Lockhart, always great to get your perspective. Love having you. Former president of the Federal Reserve Bank of Atlanta.