Business Monday

Q&A: Fed’s Dennis Lockhart: Most in South Florida won’t feel much from rate hike

Dennis Lockhart speaks during a news conference in Jackson, Miss., in 2014. Lockhart, a voting member of the Federal Reserve’s policy committee, says he believes the economy is on a satisfactory track.
Dennis Lockhart speaks during a news conference in Jackson, Miss., in 2014. Lockhart, a voting member of the Federal Reserve’s policy committee, says he believes the economy is on a satisfactory track. AP file/Sept. 25, 2014

The Federal Reserve is widely expected to raise interest rates when it meets at the Federal Open Market Committee Meeting on Tuesday and Wednesday to decide monetary policy. In one of the last public conversations with a Fed official before the event, Federal Reserve Bank of Atlanta President Dennis Lockhart told WLRN how he’ll vote and why. The wide-ranging discussion also touched on what the hike might mean for South Floridians and the housing market; and how the Atlanta branch is helping the central bank’s policies develop as U.S.-Cuban relations unfold.

What follows are excerpts from a radio interview with WLRN:

Q. Do you plan on voting for an interest rate increase at the meeting?

A. I think I’ll be in a position to support that decision providing leading up to the meeting nothing drastically changes in the current position of the economy or the outlook.

Q. What gives you the confidence at this time?

A. Looking backward, it’s how far we’ve come from the depths of the recession, particularly in the employment markets. Progress has been made in putting people back to work. Call it the solidity of the employment environment. The economy is about 13 or 14 percent larger in aggregate since the low point of the recession. Looking forward, I have confidence that we have an outlook that will continue to see moderate growth, that will make continued progress in employment, and, very importantly, that inflation will firm up and converge to our target (2 percent).

Q. For working South Floridians and retired South Floridians, what could an interest rate hike mean for them?

A. I don’t think the average South Floridian will detect a big change simply because if we make that decision, [that] mortgage rates are going to skyrocket. It’s not going to play through in a disproportionate way, in my opinion, to other interest rates for people who might be borrowing for mortgages or cars or home equity lines of credit. It also will not make a tremendous difference to savers who are looking for a little bit more income from a bank CD or from some bond that they may hold. It’s the first step in a process of moving to a lot more [of a] normal picture of interest rates that will take some time.

Q. For a lot of Americans, the normal interest rate is zero percent.

A. You’re right. At my age, you think of seven years is not such a long time, but many young people who are in the market now buying a car [and] buying a house have known nothing since high school. They’ve known nothing but low rates. So this is a change. But for people with a little bit more gray hair like me returning to normal is going to look more like what we remember back in the 1990s and 1980s.

Q. When you talk to South Floridians, maybe they won’t feel a small interest rate hike, but they’re seeing a cost-of-living increase. Insurance costs going up — health and home insurance. They’re seeing food costs [go up].

A. I hear that. And I hear it with great sympathy. I’m like everyone else who has his or her own personal inflation-rate experience... It’s small solace [and] not perhaps a totally satisfactory answer, but the answer I have to give is that prices are moving around all the time in a relative sense. For every rise in healthcare costs, we’ve had a reduction in gasoline prices. Those changes of prices that can be very prominent in your basket of consumption — that is not inflation. Inflation is a widespread, broad increase in prices. [It’s] more akin to the loss of purchasing power of the dollar. That’s what we’re trying to control.

Q. The unemployment rate in South Florida is higher than that of the state of Florida. It is higher than that of the entire United States. Is that a point of concern if interest rates are to move higher, albeit slowly?

A. I think you have to dig into the underlying reasons in any given locale for an unemployment rate that is higher. My understanding is it may be higher, but it’s not substantially higher. I think you also have to look at that in the context of the overall dynamism of South Florida economy, which I think is very dynamic and has its own life because of the foreign investment influence.

We’ve been tutored over the years by senior people at Miami Dade College. The president [and the] provost point out that their enrollment declines as the economy improves. It’s an inverse indicator, and the enrollment there has been on the decline for the last couple of years. [That] tells me that in Miami, the market that Miami Dade [College] serves, the employment picture is improving.

The fact that Miami or South Florida may be a little bit above the national average is not a reason to be terribly negative on the economy.

Q. The median household income in South Florida is significantly lower than what it is for the state of Florida and what it is for the United States. Why is that, and what kind of work can you do to address that?

A. We can’t target a geography. We can’t target a particular group with monetary policy. We really try to set conditions for the whole economy on a nationwide basis. It’s quite difficult for us to do something about that particular issue.

Q. Is that on your radar, though? Is it a point of debate within the Federal Reserve?

A. We don’t have policy debates that pit regional interests one against another. Our policy-making is not about trying to sort out how one group can get more and another group might end up getting less. We try to set a national policy that’s in the best interests of the overall economy and then leave to market forces how the distribution takes place.

I am not an expert on all the reasons that influence the unemployment rate in South Florida. One thing I would point out is that you’re very big in the tourism industry. The tourism industry does employ lower-income people in hospitality [and] in food services, for example. [Also] transportation. And those are simply somewhat lower-income jobs. Increasingly, they are part-time jobs. The income from a part-time job is not as much as a full-time job. The prominence of the tourism industry would skew the numbers somewhat in South Florida.

Q. We’ve seen state policies go after the effort to diversify the economy away from those traditionally lower paying hospitality jobs. Gov. Rick Scott has proposed [eliminating] income tax for manufacturers. [He hopes to] attract manufacturing jobs here, which tend to pay more than waiters or waitresses jobs. But it also sets up an arbitrage between states of incentives and lower taxes for industries. How much do you sense of that interstate commerce competition is becoming a zero-sum game?

A. Your terminology is exactly correct on a national basis. It’s a zero-sum game. From the perspective of the Federal Reserve, one location’s loss is another’s gain. That doesn’t do anything for the broader economy, and I cannot be a partisan in that arbitrage as you described it. We’re focused on the national economy. How the goodies are distributed are left to market forces or other forces but not monetary policy.

Q. We’ve seen the median home price in South Florida increase by about 7.5 percent. It’s close to $300,000 now. Median income is below $50,000 dollars. Is this kind of environment sustainable?

A. I think that the markets ought to work this out. When an existing population in an area increasingly cannot afford to buy a house, something’s got to give. What you have going on in Florida in general, and certainly in South Florida, is continuing inward migration. It’s often inward migration of people of reasonable means who are bringing retirement income or bringing accumulated wealth from their life of work [with them]. That can skew the real estate market for younger people or people who are in their working years.

You can get that in a lot of locations. This is not exclusive to South Florida. A lot of major cities are finding it difficult to find housing for people in the support industries for other wealth creating industries. Silicon Valley has that issue. Manhattan and New York City have that issue.

It is an issue, and I think it is an issue that civic leaders have to address by thinking about planning for housing and making sure that affordable housing is available. Otherwise, your existence is going to become one-dimensional, and many of the services that we’ve come to believe should be available will not be because people cannot afford to live there and be in that industry.

Q. If interest rates do go higher, does the housing market cool off?

A. I’m not sure you can draw a direct link between interest rates and the cooling of the housing market. I think the housing market; particularly the condominium market in South Florida, in many ways has its own logic. It’s influenced by what’s going on in other countries. It’s influenced by the prominence that Miami is taking globally as an attractive city with a lot of life and with a great daytime and nightlife. It’s attractive to young people. All of those things influence a local real estate market probably equally or more so than a few basis points change in the interest rate. South Florida, particularly Miami, is really a world unto itself in terms of the real estate market because of the number of foreign purchasers of condominiums.

Q. South Florida’s economy has significant ties to Latin America. The Brazilian economy is shrinking by 4.5 percent. Venezuela is shrinking by 5 percent. Argentina’s economy is flat. Colombia, Peru, and Chile are all slowing down. What are we to read into that for South Florida?

A. I think you have to read into that that the international environment that is very meaningful to the South Florida economy is weakening. And it’s not a good story. Brazil, particularly, is having great difficulty and a sizable contraction. With every economic trajectory that a country may enjoy or have to endure, you can have other affects that are counter-intuitive. For example, maybe some of the demand for real estate in Miami is because circumstances are getting so bad in some of these countries in South America. You don’t necessarily draw direct line of negative [economies in Latin America] equals negative [effects] for South Florida. It could actually be the reverse.

Q. It does not help trade and logistics. The Miami Customs District, which includes Port Miami, Miami International Airport and Port Everglades, continues to shrink in 2015 because of the shrinkage of demand from Latin America.

A. And I have nothing encouraging to say about that for the near term. That’s the picture I see just what you described. The emerging markets in general around the world are facing difficult circumstances. Those that are commodity-based in their economies have seen declining prices for their commodities. Much of Latin America has a commodities basis for their economies. It’s hard for me to imagine that that’s going to turn around quickly.

Q. Much of the economic distress in Latin America is internally generated. But they also face the double punch of a stronger U.S. dollar. If [the Federal Reserve begins] to raise interest rates that could increase the value of the dollar as global investors look for a currency that's going to pay a higher interest rate. Is that going to further weaken these Latin American economies?

A. It conceivably could to the extent that their imports are more expensive. At the same time, their currencies will have weakened relative to the dollar, which should make them more competitive in their exports and, in theory at least, the cheaper local currency ought to make their exports sell better to the United States and other places around the world.

Q. Is the Atlanta Federal Reserve Bank responsible for the Federal Reserve’s Cuba strategy?

A. In a very informal sense. I don’t think there is a full-scale effort to come up with a Cuba strategy. We are participating in some internal discussion groups and going to try to be a leader in those in thinking about what should be the relationship between our central bank and the Cuban central bank.

Q. Should there be a more robust strategy developed for the Federal Reserve as the diplomatic relations have been reestablished and as more commerce is taking place between the two countries?

A. That remains to be seen, but I think it’s predictable that as the relationship between Cuba, Cuba’s government and the United States and the United States government improves, there’s simply going to be more trade [and] more interaction [and] more call for U.S. cash in their economy. I would expect that, as a relationship that has been abnormal now for 50 years will become more normal.

Q. The only bank that has begun banking Cuban diplomats and providing debit cards for American travelers to Cuba is a bank in your Federal Reserve District in Pompano Beach — Stonegate Bank. Is that special merit for the Federal Reserve because of this new relationship with Cuba?

A. We’re at an early stage and haven’t drawn definitive conclusions. We’re taking baby steps now to try to anticipate what all of the aspects of the relationship with Cuba are likely to mean to the central bank. [We are] trying to anticipate those aspects, then what we have to be thinking about and planning for to support that. Mostly, it will be operational kinds of things, and to some extent, bank supervision [such as asking] questions that relate to their exposure to an emerging Cuba.

Dennis Lockhart

Job: President and chief executive officer of the Federal Reserve Bank of Atlanta. He took office March 1, 2007.

Responsibilities: He’s responsible for all the Bank’s activities, including monetary policy, bank supervision and regulation, and payment services. In addition, he serves on the Federal Reserve’s chief monetary policy body, the Federal Open Market Committee.

Previously: Before he joined the Fed, he was on the faculty of Georgetown University’s School of Foreign service for four years. Before that, he was chairman of the Small Enterprise Assistance Funds, a sponsor and operator of emerging markets venture capital and private equity funds. From 2001 to 2003, Lockhart was managing partner at the private equity firm Zephyr Management LP, based in New York with activity in Africa and Latin America. He also was president of Heller International Group, and from 1971-1988, held various positions with Citicorp/Citibank (now Citigroup).

Education: Bachelor’s in political science and economics from Stanford, 1968; a master’s in international economics and American foreign policy, John Hopkins University School of Advanced International Studies, 1971. In 2012, he received an honorary doctoral degree from Georgia State University. He was an officer in the U.S. Marine Corps Reserve from 1968 to 1974.

Connection to South Florida: In the 1980s, he oversaw the Miami office of Citicorp and was responsible for trade finance and corporate banking business. As president and chief executive officer of the Atlanta Fed, he meets with South Florida’s business and community leaders to gather information in preparation for the Federal Open Market Committee meetings.

About the Federal Reserve Bank of Atlanta: The Federal Reserve Bank of Atlanta is part of the central bank of the United States. The Federal Reserve System — the Fed, as it is often called — consists of 12 Reserve Banks around the country and the Board of Governors in Washington, D.C. The Atlanta Fed has branch offices in Doral as well as Birmingham, Jacksonville, Nashville, and New Orleans.

Website: frbatlanta.org

To hear the WLRN interview, go to http://wlrn.org/post/state-sunshine-economy-0

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