A key Federal Reserve policymaker said Monday that he didn’t favor raising interest rates at the central bank’s meeting last week because more time is needed to determine whether global market volatility related to fears over China’s growth will harm the U.S. economy.
In the wake of China’s devaluation of its currency and stock market collapse, Federal Reserve Bank of Atlanta president Dennis Lockhart said Monday, the “risks to the domestic economy ratcheted up a little.”
“It’s too early to know whether this episode amounts to a bona fide shock to the economy or just a nervous spasm in the markets,” Lockhart said in comments prepared for a speech at a local Rotary Club.
Lockhart, a self-styled “moderate” among the monetary policy committee’s 10 voting members, said that he nevertheless still favors raising rates in 2015. In August, Lockhart had suggested that the time had come, after nearly seven years, for the Fed to raise its short-term interest rate target from zero.
But at the highly-anticipated Fed meeting last week, Lockhart was among the nine voters who instead decided to prolong the zero-interest rate policy.
The intervening wild swings in the stock market were the difference, Lockhart explained Monday. Not because of concern for traders, but because the volatility could be a sign of slowing overall growth.
In particular, he cited worries about China’s struggles leading to an appreciation in the dollar and declines in the prices of commodities, both of which would depress U.S. inflation.
Lockhart said he remains short of being “reasonably confident” that inflation will head up toward 2 percent over the medium term. That level of confidence is one of the stated conditions for the Fed to raise interest rates.
Nevertheless, he added that he has “gotten comfortable enough on the inflation question to take a first step in one of the coming [monetary policy] meetings.” Even with the concerns about China, he said, he expects inflation to rise because inflation expectations are stable and the economy is growing.
