Atlanta Fed chief weighs in on economy and interest rates

lmorris@macon.comFebruary 22, 2014 

Dennis Lockhart, president and CEO of the Federal Reserve Bank of Atlanta, was in Macon recently for a luncheon at the invitation of Mercer University. The Telegraph had an opportunity to sit down with him to discuss the economy, interest rates and the banking industry.

QUESTION: Some people believe the economy should be left alone and allowed to fend for itself. What do you think is the government’s role in stabilizing the economy?

ANSWER: There are those who essentially would let whatever happens happen, and the approach that I espouse is that when there are undesirable developments -- we often call those shocks, economic shocks -- and we have the ability to counter them or lean against the wind, so to speak, for the purpose of insuring stability that is an entirely sensible thing to do. It’s within our capacity to act and we should act, and through stabilization efforts the economy preserves jobs (and) avoids disastrous effects on individuals or communities. So it seems to me perfectly sensible to do what you can do when there is a shock to the economy that is not expected.

QUESTION: What are your thoughts about quantitative easing (a monetary tool used by central banks to stimulate the economy)? Do you support it or not, and why?

ANSWER: I’ve supported all the critical decisions related to quantitative easing. I supported it when we entered into the policy, and I supported the decision to begin tapering in December. I think it has served its purpose as a temporary supplemental form of policy. It did have some beneficial effects in keeping longer-term interest rates lower than I believe they otherwise would have been. ... But I always viewed it as a temporary supplement not as a permanent feature of policy, ... and by the end of the year will be fully phased out unless something happens in the economy that is highly unexpected.

QUESTION: At a recent economic forecast meeting in Macon a Georgia economics professor said that in Georgia and in Middle Georgia, “2014 will be the first year since 2006 when things really start to feel normal.” Do you agree, and what do you think “normal” will look like going forward?

ANSWER: We seem always to be in search of normal, whatever that is. But normal, in my opinion, is never going to be simply history repeating itself. So in that sense we’re trying to always define a new normal in certain ways. The poplar notion of normal is how the economy felt in 2005-2006. We have to remember that (at that time) we were in a very robust bubble-like set of economic circumstances. ... What I think (the economist) was getting at is that we are getting to what we would consider to be acceptable levels of employment improvement, acceptable levels of economic growth. We are getting to a point where there is pretty widespread confidence in the economy, the outlook looks positive and generally things just feel better. And when things feel better, you say that’s normal.

QUESTION: We currently have really low interest rates on savings and certificates of deposit, and we have historic low interest rates on home mortgages. What will it take to find the right equilibrium?

ANSWER: The most recent projections (by members of the Federal Open Market Committee) for the long-term equilibrium policy rate have been 4 percent. So you can take that as sort of the foundation of interest rates in the long term when most of the members of the committee think things have returned to really substantially normal. The CD savings rate at a bank would be higher than that.

Also, those projections don’t assume that we’re going to get to that 4 percent equilibrium rate quickly. So, it will be some more years before we get to that point. The conditions that would create higher interest rates for investors and for borrowers would be a healthy economy that’s closer to full employment (and) that seems to be operating with healthy data at all capacities.

QUESTION: What are your thoughts about Janet Yellen (who took over as Fed chief when Ben Bernanke’s term ended at the end of January)? Do you think she will make any changes or maintain Bernanke’s policies?

ANSWER: I think the interpretation of her comments in her recent testimony was that she represented continuity with the Bernanke policy approach and also continuity from the point of view of emphasis on transparency and good communications. ... I continue to believe that (Chairwoman) Yellen will really carry forward the basic approach that Bernanke was the leader of.

QUESTION: Bank regulators are putting greater restrictions on the banking industry. Do you think the pendulum has swung too far?

ANSWER: I think we are clearly in an era of a lot of corrective legislation that is the direct result of the excesses of the 2000s period. ... I think regulators have some scope -- even though they operate within laws -- to relax based upon conditions and the track record of the regulated institutions. So with continuing good practices in the banking and financial world, it wouldn’t surprise me if there is some relaxation over time.

QUESTION: Do you expect any more bank failures in the state this year? Was part of the problem that we had too many banks anyway so the losses are a correction?

ANSWER: The epicenter of bank failures, not only in Georgia but in the country, was north of Atlanta. The story there is substantially (the banks) were too exposed to residential real estate when the residential real estate industry tanked. The banking industry in Georgia and across the Southeast ... is substantially improved. It’s much, much healthier. I think it’s possible there will be a few more failures, but very few.

QUESTION: What is the economic rationale for lowering interest rates for an extended period of time, which has the effect of penalizing savers and rewarding stockholders?

ANSWER: Low interest rates favor borrowers and don’t equally favor investors or savers. The reason for low interest rates is to stimulate more economic activity. .... We live in an economy that is dominated by consumer activity. About 65 to 75 percent of the U.S. economy can ultimately be tied to consumer activity. Also we live in an economy where corporate investment has a lot to do with overall spending in the economy. Both consumer activity and corporate investment are influenced by the cost of money, the cost of borrowing. So it is a trade-off in any given time, and I don’t know what else we could have done to support the recovery but to keep interest rates low.

QUESTION: What suggestions do you have for people who have saved their whole lives and who may rely on interest from savings to supplement their income but now have to reduce their standard of living or dip into their savings because of low interest rates? What has to happen to improve this situation?

ANSWER: Certainly my colleagues are acutely aware of the difficulty that’s presented by a low-interest rate environment particularly for retired people on a fixed income or people who live off bank CDs. ... But everyone has an interest in a healthier economy. Those very same people would be in even more distressed circumstances if the economy remained in a bad condition or worsened. The one thing that unites us all is we would like to have a better economy, and low interest rates are a means of getting that economy.

To contact writer Linda S. Morris, call 744-4223.

About the Federal Reserve System

• As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States.

• The Federal Reserve is considered an independent central bank because its monetary policy decisions do not have to be approved by the president or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

• Janet Yellen took over as Fed chief at the end of January from Ben Bernanke. An economist, Yellen is the chairwoman of the Board of Governors of the Federal Reserve System, previously serving as vice chairwoman from 2010 to 2014.

• The 12 regional Federal Reserve Banks were established by Congress as the operating arms of the nation’s central banking system.

• The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and sections of Louisiana, Mississippi and Tennessee. As part of the nation’s central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.

Source: The Federal Reserve System

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