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Economy

'Scope for three' rate rises this year: Fed's Dennis Lockhart

Federal Reserve Bank of Atlanta President Dennis Lockhart (Photo by Takeshi Kawanami)

ATLANTA -- As the U.S. continues its solid but moderate growth and uncertainty surrounds China's slowing economy, speculation is rife about possible moves in the U.S. to adjust interest rates. Federal Reserve Bank of Atlanta President Dennis Lockhart sat down with The Nikkei recently to discuss the world economy and the timing of a possible rate rise, as early as the Fed meetings in April or June.

Q: How is the global economy as a whole? How good is the U.S. economy and how bad is the Chinese economy?

A: The American economy continues to grow at a moderate pace -- probably between 2% and 2.5% annualized rate of growth. That means the data that we watch is mixed -- it's not all strong and it's not all weak. A data picture that's mixed is consistent with a moderate pace of growth. So, I don't expect every number to be strong.

     I continue to believe that, for 2016, the outlook is to grow a bit better than 2%, overall, for the year. So, that's not outstanding but it's acceptable.

     A couple of points I would make about China. The first is that what I see is a slowdown. They are trying to make a profound transition in this model of their economy.

     As you know, there's much skepticism about how accurate the numbers are for the Chinese economy. I'm somewhat sympathetic, because it's 1.3 billion people. With rapid change, it's hard to measure that. Even if it's lower, the key thing is the direction, which is slower.

     The other point is that China has become so important to the global economy, so large, that what happens in China matters a great deal to global demand.

Q: Janet Yellen has always insisted that every meeting is a "live meeting." How do you see the possibility, or do you support the idea, of raising rates in the coming months, for example in April or June?

A: It will depend on how the data develops. If it continues to confirm a basic outlook of moderate growth or getting closer and closer to our objectives, in employment and inflation, then a further rate increase in one of the next two meetings may be justified. I can't say today, because I don't know what we'll see over the coming weeks. Between now and April 27, when our next meeting begins, we have enough reports for me to make a judgment about April. So I support Janet Yellen's simple statement that April is a live meeting, and that we will have some meaningful information, between now and April.

     It is not a press conference meeting, so I may have colleagues who feel that it's more sensible to wait, but if the data is positive or generally positive, in the next two meetings we can make one more move.

Federal Reserve Bank of Atlanta President Dennis Lockhart (Photo by Takeshi Kawanami)

Q: Do you need to do that in April? Why not wait until June? It's just two months. There will be a press conference and the market has started to expect that.

A: That is a good argument. I don't see a lot of risk of a policy error from an approach that is patient and deliberate. I don't think we're behind the curve, in terms of inflation. So even with good data, it will not be mandatory that we move in April.

Q: What is your reaction to negative interest rates?

A: The move the Bank of Japan made was followed by the European Central Bank going even further into negative territory, so the two moves we've seen in the last few weeks generated a great deal of discussion about whether negative rates would ever happen in the U.S. In some respects, I think it's regrettable that we had that discussion, because it's not a relevant topic at the moment, in the U.S. It raised too many expectations that we were "thinking about" such a move.

     The circumstances do not call for negative rates in the U.S., so it's a hypothetical discussion.

Q: There could be an impact if this negative rate policy is targeted at currency depreciation. 

A: That's one of those feedback loops that have now become important to monitor and to follow, because if we pursue our policy of gradual normalization, at the same time that there are negative rates and maybe even further moves into negative territory, that divergence could have an effect on the exchange rates, which weakens our exports, for example, and tightens financial conditions in this country, and that raises the question of whether we need to make a rate move to tighten financial conditions.

Q: How many rate hikes do you expect this year? Do you see more than two, which seems to be the consensus in the Federal Open Market Committee?

A: I would not rule out more than two. I just think there's still scope for three increases this year. I do not expect four increases, but I think there is scope for three.

     And, if the data is strong enough, you may see the dot plots, in June, shift to something greater than two. But the dot plots are not a plan -- certainly not a commitment -- but they are an indication of the thinking of 17 individuals.

Interviewed by Nikkei staff writer Yamato Sato

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