A Fed's-Eye View
A Q&A with the president and CEO of the Federal Reserve Bank of Atlanta.
Since 2007, Dennis Lockhart has headed the Sixth District Federal Reserve Bank in Atlanta. It is one of 12 regional banks that functions as an operational arm of the Federal Reserve Bank, the country’s central bank charged with setting monetary policy and regulating the banking system.
This year Lockhart is one of five district bank presidents who are voting members of the Federal Open Market Committee (FOMC), the body that makes decisions about raising interest rates – something it is expected to do later this year.
The Sixth District covers all of Georgia, Florida and Alabama and parts of Tennessee, Mississippi and Louisiana, an area that includes about 42 million people and accounts for about 13 percent of the Gross Domestic Product (GDP). The Atlanta Fed has a research staff of 60 that monitors the economy.
Georgia Trend’s Editor-At-Large Susan Percy talked with Lockhart in his office at the bank headquarters in Midtown earlier this spring, as anticipation was building for the first interest rate increase in six years.
Following are edited excerpts from the interview.
GT: There has been a lot of talk about the Fed raising interest rates at an upcoming FOMC meeting. What can you tell us?
Lockhart: The meetings likely to be in play for raising the policy interest rate are June through September – possibly later, depending on how the economy develops – but I think June, July and September will be meetings in which we will deliberate on that decision.
GT: What exactly will be in play?
Lockhart: The Federal Reserve controls or substantially influences only short-term rates through policy rate – the federal funds rate that’s an overnight rate at which banks borrow or lend for the purpose of meeting reserve requirements at the central bank. When we raise that, the expectation is that most other rates will follow. So private sector rates, long-term rates, ultimately mortgage rates, car loan rates, business borrowing rates should respond to our pushing up the foundational rate.
GT: Could you describe the process that determines a rate change?
Lockhart: Let me take you to the FOMC. We have eight meetings a year in Washington, two-day meetings. Every reserve bank president attends, and all the [board] governors attend. My head of research accompanies me. There are a number of Washington staff in the room. We have a review of the economy through staff presentations – both the domestic economy and international developments. We go around the table and each of [now] 17 of us give our take on the state of the economy and the outlook for the economy. Monetary policy is forward looking – it has its effect with a lag. So what we do at the next meeting may not influence the economy for six to 18 months. We have to be looking ahead to determine what’s the best policy at the moment.
GT: What happens next?
Lockhart: After the economy round, there is another round in which we talk about policy, and we talk about the policy decision itself. We also talk about how we communicate the policy decision. There is a fair amount of discussion of the exact wording of a statement that comes out after the FOMC meeting, and there is sometimes discussion of what should be in the minutes – the minutes come out three weeks after the second day of the FOMC meeting. Those are the two principal communication devices, and we actually talk about not only the policy but also what we should say about it and how it should be communicated.
GT: Has the decision already been made to raise the policy rate sometime this year?
Lockhart: Not yet. There’s much anticipation. So you read about it virtually every day. In our various forms of communication, we have led the public and the markets to believe that sometime in 2015 it’s likely to be the first FOMC Federal Reserve change in the policy rate for about six years. It’s been a very substantial period at which we have kept the policy rate at rock bottom, low as it can go. So this is a very important decision to start the process of normalizing interest rates.
GT: And this “liftoff” is likely to happen in June, July or September?
GT: Are all 12 district banks equally influential?
Lockhart: The Federal Reserve Bank of New York, because it’s in the financial center of the country, is really the first among equals. It’s larger in scale, has more resources and, very important, runs what we call the desk, or the money desk, which is really a trading room in which activities take place to support implementation of monetary policy. So New York is by far the largest and most important in the system.
Then I would say it’s roughly equal. But the districts that each bank covers differ in size and to some extent in economic clout. The Atlanta bank is one of the larger ones both in terms of employment and the district we oversee.
At the FOMC table, the amount of clout depends upon the quality of your contribution. I think we all spend a fair amount of time preparing for those meetings to make sure we have something valuable to say.
GT: Tell us about the Atlanta Fed’s role in overseeing banks.
Lockhart: Policy is made in Washington by the board of governors. There is a very clear division of labor between policy-making – think of that as regulatory policy – and the implementation of regulatory policy. That’s supervision. The reserve banks do the lion’s share of supervision.
GT: How does that work?
Lockhart: The principal method is through an examination. With the larger banks, examinations are occurring very frequently on aspects of that bank. So we might look at a particular portfolio – the mortgage portfolio or the car loan portfolio or commercial and industrial portfolios.
For the smaller banks, essentially you look at the entire bank. We give them a numerical grade. If a bank’s condition is less than satisfactory, that can have an influence on their ability to merge or acquire or expand. We also have some authority over their ability to pay dividends or to buy back shares. Those are called distributions. We’re looking at a bank’s condition. It is forward-looking in the sense that we are anticipating the overall state of the economy in which the bank would be operational. [But] mostly it’s a current-state evaluation.
GT: Georgia banks were hit particularly hard during the financial crisis. Was it just a matter of too many real estate loans?
Lockhart: In many respects, North Georgia was the epicenter of bank failures in the country during the deepest months and years of the recession. Why? First there were many bank charters given, and many de novo banks – new banks – were formed in the go-go years prior to the crisis. Many of those banks were overly concentrated in residential real estate and to some extent in commercial real estate, acquisition and development loans. So when we saw the rapid fall-off in home sales and the rise in foreclosures and the deep recession in new home construction, the banks that were too concentrated were hit very hard.
GT: Were there other factors?
Lockhart: Many of those banks were not totally funded by core deposits of consumers but depended on wholesale funding, so they had some element of their liabilities, their funding base, that came from what people often call “hot” money, money that was seeking a good yield. But when there was a sign of trouble, that money went away rapidly. So banks ended up with funding pressures, and some of them got to the point where they couldn’t fund all their assets. The assets were illiquid, and the funding was basically moving away. That’s the basic story. Unfortunately, many of those banks were quite young and just hadn’t been able to diversify adequately.
GT: How would you characterize Georgia’s banking industry today?
Lockhart: Very, very much improved. A much stronger overall position. In effect, the better-managed banks are the survivors, and they have come through this and are in much stronger condition. There will still be, in any given year, a few bank failures. I should emphasize they almost always will be covered by FDIC insurance. The failure of the bank is not good for the bank and shareholders of the bank, but it is not a disaster for the depositors.
GT: What are the lessons learned for Georgia banks?
Lockhart: Among the lessons is to have a balanced portfolio, not all your eggs in one lending basket. We have encouraged the banks we supervise to have a nice balance between business banking and consumer banking and within business banking, a range of different industries.
By nature, a smaller bank is concentrated geographically. Banks can mitigate that problem a little bit by participating in loans that are originated elsewhere or by sometimes lending to companies that have broad geographic business interests. But for the most part, a community bank is going to be limited to that community, and the health of the bank is going to be reflected in the health of the economy of that particular town or particular region. We encourage diversification within that constraint.
On the liability side, good liability management means strong core deposits, understanding the interest rate sensitivity of depositors. So having some long-term deposits in your mix and, very importantly now, forward planning on both the asset and the liability sides of the bank’s balance sheet to really have a good sense of what happens under different scenarios.
GT: What’s your assessment of the region’s economy?
Lockhart: The economy of the Southeast is really now quite well diversified. We studied the industrial composition of the six states in which we have involvement, and that picture closely resembles the country overall. That’s not exactly to say as the Southeast goes, so goes the nation. But the Southeast is a very good representation of total U.S. economy. Within the Southeast, you have a number of different sub-economies that have their own life.
GT: What are they?
Lockhart: Louisiana is heavily involved with oil and gas. At $110 a barrel, that would represent one picture of economic strength; at $50 a barrel, that’s a different picture.
In South Florida, particularly Miami, one of the drivers of that economy is condominium development, and Miami is just going gangbusters now in terms of real estate projects. That’s a unique economy that has the influence of foreign buyers in the market, and tourism obviously is a big driver. Places like Middle Tennessee are influenced by the auto industry. Alabama is influenced by the auto industry. Nashville is a center for healthcare management. The Southeast is a mosaic of sub-economies, but when you add it all up, it looks like the U.S.
On balance, I would say the Southeast economy and the Georgia economy have slightly lagged the U.S. economy through the recovery.
Lockhart: Residential real estate development – homebuilding, which was very important to the Southeast because of inward migration, was hit very hard, so construction fell off somewhat more dramatically than some other places in the country. To come more narrowly to Georgia, the same description is applicable. It has slightly lagged the recovery in the U.S. overall. I wouldn’t say dramatically, but slightly; but [it is] well represented in the downward path of the unemployment rate.
GT: And looking ahead?
Lockhart: The picture in Georgia is pretty upbeat for the coming months and medium-term. We will see continued growth in employment. I expect continued strength of consumer activity. The job growth is pretty well balanced, pretty broad based. So I think there are reasons to be quite optimistic.
GT: The Fed has been concerned with the phenomenon of part-time employment. Could you talk about that?
Lockhart: There are people who are voluntarily part time, and there are those who are involuntarily part time, [which] we interpret as being a form of underutilization of labor resources. We talk in terms of the employment gap. In a full employment situation, those involuntary part-time people could be absorbed into the full-time workforce. We would see a substantial reduction in the number of part-time. In the country overall, the most recent number is about 6.8 million people. Part-time workers increased during the recession and have come down, but not equally with the reduction in the official unemployment rate.
GT: Any particular industries affected?
Lockhart: It’s concentrated in retail, restaurants, hospitality, construction. I met with the chief executive of a fast food or QSR [quick service restaurant] company headquartered in Atlanta. She told me their ability to schedule their workforce now is much more precise than it would have been 10 years ago. They can schedule to the traffic. But because the hours are spread across the workday in different patterns, that makes it harder [for an employee] to hold a second part-time job. That’s a concern.
GT: Is there an answer to this problem?
Lockhart: The answer is a stronger and stronger economy that absorbs the involuntary part-timers because their work is demanded more on a full-time basis. Still an open question is to what extent have employment patterns just changed. And is there more of a structural element to the involuntary part-time workforce, meaning it’s harder to change that picture, harder to absorb those resources?
GT: What can you tell us about prospects for economic growth in the U.S. and Georgia?
Lockhart: The basic baseline outlook is continuing growth at a moderate pace of growth – we would define that as 2.5 to 3 percent GDP growth annualized. At the moment there is some ambiguity in the picture of the economy, because we have seen the U.S. dollar appreciate very rapidly, seen oil prices drop very rapidly. We have had some weather effect in the first quarter of 2015, and then we always have some inventory cycles and things that cause differences from quarter to quarter. At this very moment, the economy is throwing off mixed signals.
GT: Is this something to worry about?
Lockhart: I don’t believe those signals are an indication of a dramatically weakening economy. I think most of those influences are transitory and that we can expect a moderate pace of growth going forward. With that should come job growth and reduction in unemployment, however you measure it. I think we will see prices firming – another way of saying gradually the inflation rate will rise. That is an objective of our policy, to get the rate of inflation to a healthier level – we define that healthy level as around 2 percent. [The current rate of inflation in the U.S. is -0.1 percent.]
It’s not an over-the-top kind of outlook, but it’s a very respectable and healthy outlook for the economy, and I think Georgia will participate in it.
ABOUT THE FED
• The Federal Reserve Bank, which serves as the central bank of the United States, is headquartered in Washington, D.C. Janet Yellen is the bank’s chair.
• The Fed sets the country’s monetary policy, regulates and supervises the banking system and operates the nationwide payment system.
• The bank’s board of governors, fully staffed, numbers seven, all political appointees; at present there are two vacancies.
• Twelve district banks, including Atlanta’s, carry out Federal Reserve policy and conduct economic research.
• Dennis Lockhart is president of the Sixth District Bank in Atlanta, which oversees Georgia, Florida, Alabama and part of Mississippi, Louisiana and Tennessee. There are branch banks in Birmingham, Jacksonville, Miami, Nashville and New Orleans.
• Yellen chairs the Federal Open Market Committee (FOMC), made up of the board of governors and, on a rotating basis, five district bank presidents, including Lockhart (although all presidents attend the meetings). The committee meets eight times a year and is responsible for setting the policy interest rate, which affects the banking system and ultimately the entire financial industry.
• The Fed has a total of 20,000 employees, including Washington and district bank staffs.
• The Atlanta bank manages the Federal Reserve part of the payment system – check processing and a form of electronic funds transfer called ACH, or automated clearinghouse, used by many banks for small-ticket transfers like payroll direct deposit. Millions of checks are cleared each day.
• The Atlanta bank’s sixth district board has nine members, including three bankers and six representatives from the business community and consumer interests. Tom Fanning, CEO of Southern Company, serves as chair of the district board. – Susan Percy
Source: Federal Reserve Bank