Lockhart Says Fed Rate Consistent With Inflation Drop

By Scott Lanman and Steve Matthews

Aug. 27 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank's interest-rate stance is ``consistent'' with slowing inflation, while signaling readiness to raise borrowing costs if needed.

``Current Fed policy is consistent with an easing in overall inflation given the dynamics of the economy,'' Lockhart said in a speech today in Atlanta. At the same time, ``I am mindful of today's elevated risks and am prepared at any point to change tactics to ensure inflation expectations do not become unanchored.''

Policy makers agreed on Aug. 5 that their next change in rates would be an increase, according to minutes of their meeting released yesterday. A number of officials concerned at rising risks of inflation favored an increase earlier than traders expected, the minutes also showed. Lockhart will vote on rates for the first time in 2009.

``Although recent measures of inflation are higher than I would like to see, I would say that recent price increases are more likely to be transitory than persistent,'' Lockhart said in the speech at Georgia State University's economic forecasting conference. Inflation expectations ``may have risen modestly -- but not by a material degree,'' he said.

The Fed left its benchmark lending rate unchanged at 2 percent for the second straight meeting on Aug. 5, after 3.25 points of reductions over the past year. Traders see a 79 percent chance the central bank won't raise rates again this year, based on futures prices. A month ago, traders were placing 75 percent odds on an increase.

`Medium Term'

Fed Chairman Ben S. Bernanke said last week inflation should ease later this year and in 2009, while warning that policy makers will act if price increases don't slow over the ``medium term.''

Lockhart said in an Aug. 15 interview he prefers to keep interest rates unchanged for now, while policy makers will likely debate whether to raise them in coming months.

Lockhart, 61, joined the Atlanta Fed in March 2007 and previously worked at Citigroup Inc. for 17 years.

His speech today focused on inflation without giving a broader economic outlook. Economists expect annualized rates of growth of 1.2 percent in the third quarter, according to the median estimate in a Bloomberg Survey.

Answering audience questions, Lockhart said his ``best guess is that home prices will continue to decline,'' with an additional fall ranging from 10 percent to 15 percent.

Recent news on Fannie Mae and Freddie Mac, the mortgage- finance companies recording high credit losses, has shown ``positive signs,'' Lockhart said. He declined to elaborate.

`Fluid Situation'

Freddie Mac sold $2 billion in short-term debt this week, and shares in both companies have gained. Still, ``it's a fluid situation,'' he said.

The consumer price index rose 5.6 percent for the 12 months ending in July, which Lockhart said was a ``high and worrisome number.''

The Fed's preferred benchmark, the personal consumption expenditures price index, minus food and energy, has been at 2 percent or higher since March 2004. Adjusted for the so-called core PCE rate, the real federal funds rate is slightly below zero, the lowest since November 2004.

While core-inflation measures ``can be useful tools,'' Lockhart said that ``I ultimately care about the trend rate of overall inflation, which I believe is ultimately the appropriate object of monetary policy.''

`Uncomfortably High'

``No matter how you measure it, the aggregate inflation we are experiencing in the United States at the moment is uncomfortably high,'' Lockhart said.

Crude oil has dropped to $117.62 a barrel from its record $147.27 on July 11. The decline will help reduce broader inflation pressures, Lockhart said. ``But the underlying global supply pressures remain tight, and demand pressures remain relatively high,'' he said. ``As such, any relief will likely be only partial.''

The Fed shouldn't raise interest rates in response to higher energy prices because monetary policy can't affect supply and demand in global oil markets, and such actions would probably do more harm by reducing Americans' real incomes, Lockhart said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net.