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Fed rate hike ‘shows very strong commitment to tame inflation,’ former Fed official says

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Former President of the Federal Reserve Bank of Atlanta Dennis Lockhart sits down with Yahoo Finance Live to examine the outlook on the Fed's 75 basis point interest rate hike decision, Fed Chair Jerome Powell's goals in managing inflation, and how the labor market and gas prices are influencing inflation.

Video Transcript

- So let's talk a little bit more about the Fed's decision today. And for that, we want to bring in a former President of the Federal Reserve Bank of Atlanta, Dennis Lockhart. Dennis, it's great to see you. Thanks so much for joining us.

DENNIS LOCKHART: Thank you.

- So let's just start with the Fed's decision today because you've been in that room before. You've been forced to make those types of tough decisions. What's your reaction to the 75 basis point hike?

DENNIS LOCKHART: Well, I think it shows very strong commitment to tame inflation. Earlier this week, if you'd asked me, I would have expected 50 basis points, not 75. The Fed tends to operate in a steady, deliberate manner. And they had signaled 50 basis points so strongly that I opted for 50. Clearly, the 75 basis point move shows that they think the situation requires aggressive action and a faster timeline.

And I think we should all be comfortable with 50. They were prepared to take-- with 75. They're prepared to take the risk that this surprises markets. And as you pointed out a few minutes ago, the initial reaction is not dramatic. So I think this is probably a very good move on their part.

- Yeah. Appears to have been baked in here to the markets. What do you think really shifted the Fed's thinking? Was it that CPI of 8.6%? Was that combined with the consumer sentiment at an all-time low?

DENNIS LOCKHART: Certainly, the news last week probably weighed heavily on their thinking. You had both the consumer sentiment number, which is related to the risk that expectations become unanchored, as well as the CPI numbers last week. And I think they looked at all of that, and they said, we just have to be aggressive because the situation is not improving. It's plateaued. It's not accelerating. But the inflation rate is not coming down.

- But where does the policy go from here? Obviously, you have this 75 basis point hike. But you also have, of course, the tightening of the balance sheets. If you could look through your crystal ball, how do you see the Fed proceeding from this point? And what would you do if you were in their shoes?

DENNIS LOCKHART: Well, I would interpret the 75 basis point move today as continuing to put the balance sheet policy in the background and to keep it on autopilot. They did have the option of announcing some kind of change in the pace of running down the balance sheet. They didn't do that. And I think that's because they really don't want to change, particularly so early, that policy.

So the interest rate, the policy rate is the main event. It will continue to be. I think it raises the question, do we see 75 in July, or even possibly in September? That remains to be seen. I think the press conference today will give us a better indication of what the thinking of the committee is.

- And, Dennis, what do you think is critical for the Fed for Jay Powell to convey during that press conference because we heard from a number of guests leading up to this decision that the Fed's messaging at this point can be thought of as even more critical.

DENNIS LOCKHART: I think he will repeat the whatever it takes mantra that he's been using and probably almost pound his fist rhetorically behind that point, that the Fed will step up to this challenge, even as an earlier speaker pointed out there are multiple causes of this inflation. Some of the root causes are not easily addressable with monetary policy. But I don't think there's any question the Fed is going to step up and do everything it can to bring that inflation rate down near 2%.

- And, Dennis, these are unusual times in which friends who usually only ask me about Yankees and Red Sox standings are watching Fed meetings, are worried about hearing this number, first biggest rate hike since 1994, saying, I thought this economy was healthy. That number scares them. What do you say to those people that feel like we are on the edge of a recession or maybe already in it?

DENNIS LOCKHART: Well, it's a dramatic time, obviously. And central bankers prefer to be boring and in the background. And it's just the opposite. The economy is not indicating at the moment that we're on the edge of a recession. I do think we have to define what we're talking about, whether we're talking about a technical recession of two quarters, half a year of negative growth contraction, or we're just talking about a slowdown. I think the committee still believes that with appropriate policy and some good luck, they can still bring us down to a soft-ish landing and not hurt unemployment too badly. But the front and center task is to deal with inflation. And I think that they signaled today that they're up to that task.

- And, obviously, you mentioned the key factors that the Fed looks at there when you talk about unemployment then, of course, inflation. But do you think at a certain point they will start keeping an eye on what they're seeing with the equity markets, even though that's not their priority?

DENNIS LOCKHART: They tend to look at the equity markets, even under circumstances we've seen in the last few weeks, as a financial stability question, not necessarily a Powell put or a Fed put kind of decision, but more one of whether what's happening in the markets is actually going to undermine the dual mandate objectives of price stability and maximum employment.

So that's the lens through which they'll look at market performance. And if it is really beginning to undermine what they want to see develop in the real economy, the Main Street economy, then they may act. But, otherwise, they will simply watch what's going on in the markets.

- Dennis, you mentioned before the tools in order to fix this. And it doesn't only lie within the Fed. There's certainly a number of factors contributing to inflation, some of that having to do with the supply chain issues that we've seen recently. Obviously, record high gas prices. What else do you think or what else needs to be done in order to bring back inflation?

DENNIS LOCKHART: Well, I use the term luck. I think a bit of luck in terms of supply chain issues is going to be very important because the supply chain restoration or improvement seems to have been a much slower process than anyone would have predicted. So that's not easily treated by public policy. It's thousands and thousands of supply chains affecting lots and lots of products. So they need some luck on that front that those efforts in the private sector are occurring.

At the same time, I think the public policy can do something about the cost of gasoline and the cost of energy. The administration appears to be doing several things that try to address that. I'll tell you my concern is that the Fed is taking on most of the responsibility, almost all of the responsibility, for inflation when their tools are designed just to deal with the demand side and not the supply side. And the temptation to use those tools very, very aggressively could put us in a more recessionary environment than might otherwise have naturally happened. I think that's a legitimate concern.

- Dennis, is there something you'd like to see from the administration or from Congress that could bring down prices?

DENNIS LOCKHART: I think the key price issues for most households in America are gasoline prices and food prices. I am sure there are some regulatory and other decisions, including foreign policy decisions, that can be made that might have some effect in the relative near term on those two categories of purchases. And they should be looking at every one of their options. I don't have any specific recommendation. But, clearly, they have to look at everything that could do and then decide what they're prepared to do.

- And with just a few months to the midterms, we know they're keeping a close watch on that. We do thank you for joining us today. Dennis Lockhart there, former president of the Federal Reserve Bank of Atlanta. Thank you.

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