ATLANTA (Reuters) - The weak global economy and low inflation pose risks to the U.S. economy but the Federal Reserve should still be on track to begin raising interest rates in the latter half of 2015, Atlanta Federal Reserve Bank President Dennis Lockhart said on Monday.
With labor markets steadily improving, Lockhart said it is concerning to him that inflation has not yet picked up, suggesting there may be more slack in the economy than expected.
“Inflation is the one key element that does not seem to be consistent with what we are seeing in terms of growth and what we are seeing in the labor market,” Lockhart said. If inflation “goes completely sideways or begins to indicate a decline, disinflation, then I think it will raise some concerns.”
The Fed, he said, will need to determine how much drag on inflation is coming from developments that are over time a net plus for the economy - like lower energy prices - and how much below-target inflation indicates underlying weakness.
He said he remains optimistic the economy will grow at around 3 percent in 2015, the job market will continue to improve, and inflation signals improve enough that the Fed will be in position to begin tightening interest rates in the latter half of the year.
“The momentum I perceive in the economy gives me confidence that the Federal Open Market Committee can consider beginning to normalize interest rates in 2015,” he said at a symposium here.
Lockhart does not currently have a vote on the Fed’s main policy committee, which meets next week. But he will have a vote next year. He is considered a centrist voice, and said on Monday he still counsels caution in approaching the first rate hike, and in particular said he was “not in a rush” to drop language from the Fed’s statement that there remains considerable time before the first rate increase.
It would be better to wait longer, he said, then raise too soon and damage the recovery. When rate hikes begin, he said the Fed will probably move slowly and cautiously, and not wed itself to a set path of increases at each meeting as it has done in some past tightening cycles.
He also said that the economic weakness in Japan, Europe and elsewhere could “spill over to our economy and financial markets.”
But “the balance of current economic evidence is encouraging and supports an optimistic outlook.”
Reporting By Howard Schneider; Editing by Andrea Ricci