Cantillon: Lots of interest in new rate increases

The sudden intrusion into the debate on the timing of an interest rate move by Dennis Lockhart has been telling.

The president of the Federal Reserve Bank of Atlanta is a voting member this year on the Federal Open Markets Committee which decides interest rates. More importantly, despite the hawkish tone of his comments, he is viewed as a centrist, more likely representative of a consensus shift than some more trenchant colleagues on either extreme of the debate.

In an interview with the Wall Street Journal, Lockhart said it would take "a significant deterioration in the economic picture for me to be disinclined to move ahead" in September.

“I think there is a high bar right now to not acting,” he added.

That is by some distance the most forthright insight on the Fed’s thinking to have emerged since its last meeting and Lockhart’s comments were sufficient to drive the dollar to a four-month high.

The more cautious views of Fed governor Jerome Powell, who told CNBC yesterday he would be guided by forthcoming economic data and had yet to make up his mind, did little to dampen the market's growing conviction that the Fed will move to increase short-term rates when it next meets on September 16th and 17th.

While a Fed move to raise rates that have been close to zero since 2008 before the end of the year has been widely flagged, including by Fed chairwoman Janet Yellen, she has been careful not to be any more specific on the timing of a move as the central bank continues to monitor occasionally erratic economic data.

There has also been pressure on the United States from elsewhere – notably emerging economies that will likely feel a backlash from any US rate rise – though, with a move in the near future inevitable at this stage, such concerns carry little influence.

The July figures for non-farm payrolls are published tomorrow. A strong set of numbers would lend further weight to Lockhart’s point of view: weakness might yet give pause for thought, especially as inflation continues to undershoot its target.

The balance of probability has certainly swung more strongly in favour of a September increase but, as any such move would be the start of a gradual series of increases, it’s not yet a slam dunk.