This week on Facing the Future we talked with Dennis Lockhart, who served as President and CEO of the Federal Reserve Bank of Atlanta from 2007 to 2017. In that role, he was a voting member of the Federal Open Market Committee (FOMC), helping set the nation’s monetary policy during one of the most turbulent economic decades in recent history—including a global financial crisis and the Great Recession. Concord Coalition Executive Director Carolyn Bourdeaux joined the conversation.
With the next meeting of the FOMC scheduled for September, there is much speculation about whether they will cut the federal funds rate for the first time since December of 2024. At that time, the rate was cut by 0.25 percentage points, lowering the target range to 4.25% – 4.50%, where it has remained.
Lockhart said that “overall the economy is OK,” but he can see signs of trouble. “Recent data, both the employment data and to some extent the inflation data, seem to be pointing toward a stagflationary dilemma. In stagflation, you have the worst of both worlds. You have inflation rising and unemployment tanking at the same time,” he said.
Until the latest disappointing jobs report, Lockhart thought the Fed’s priority was on fighting inflation, but he said, “with the almost startling data we got a couple weeks ago that suggests the overall employment picture isn’t quite as rosy as we thought, it’s more of a dilemma, it’s more of a trade-off.” The FOMC will “have to make a judgment of which is the more serious situation,” he said.
Over the longer-term, Lockhart believes that the U.S. is on an unsustainable fiscal trajectory. “I expect that if we stay on this course,” he said, “there will be a reckoning, but I cannot tell you when that reckoning will occur, and in what form it will occur. It could be an event that is crisis-like or it could be a slow train wreck. Having said that, the prudent and responsible thing to do is to head it off before it happens.”
If nothing is done to put the budget on a sustainable path Lockhart said that “sooner or later, the investment markets of the world will discipline the sovereign. You would have turmoil in the auctions that occur periodically to refinance the debt. If you have real turmoil in the auctions, the only way to get the offering of debt that’s being refinanced is to raise the interest rates. So, interest rates would rise, particularly higher long-term rates, which are what the public cares most about – the cost of buying a home, auto rates, also investment rates for corporations. And rate-sensitive sectors would take a hit, probably fairly quickly. The most rate-sensitive sectors are housing and autos.”
“If it’s serious enough,” Lockhart continued, “the psychology would spread to other sectors in the economy, so a crisis psychology begins to develop. The financial sector itself could end up in distress and all that would lead to a recession. It’s a question of how deep a recession and how long a recession, but the longer we go without addressing in a fundamental way we manage our fiscal business, I would argue the more severe is going to be the recoiling once it happens.”
Lockhart advised that the “ultimate goals of a sustainable situation would be either a balanced budget or a deficit that is comfortably below the long-term growth rate of the economy, so that the debt-to-GDP ratio is stabilized. Now, the methods of getting there, I have to say, it’s very hard for me to be terribly optimistic because you have to employ tools that all add up to reducing the flexibility of Congress in wielding its fiscal responsibilities.”
He added that “central bank independence is a fundamental of good governance. It’s been studied by academics around the world who’ve shown that you get better inflation results and better economic results when a central bank operates independently, and the independence of the Fed in formulating monetary policy has been central to how we’ve run this country for decades. Now it seems to be under some duress. I don’t know that it’s permanent, but certainly at least temporarily that independence is at risk. It’s not a good development, in my opinion.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
