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Fed's Lockhart says weak demand puts rate hike timetable in doubt

Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, arrives at the opening reception of the Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 21, 2014. REUTERS/David Stubbs

By Howard Schneider

JACKSON Miss (Reuters) - Atlanta Federal Reserve bank president Dennis Lockhart said the U.S. economy is still hampered by weak demand at home and internationally, potentially pushing the need to raise interest rates later into next year.

The forces that could weigh on the U.S. recovery include the recent run-up in the value of the dollar and the potential that could choke exports, Lockhart said, becoming the latest in a series of Fed officials this week to cite concern about currency appreciation.

Even though economic growth appears to be holding up at around 3 percent on an annual basis, Lockhart said consumer spending remains weak, wage growth is slow, and continued troubles in Europe have added to concerns about the global economy.

Taken together, that could weigh on the Fed's progress in raising inflation toward its two percent target and require more patience from the central bank in deciding when to begin its first rate tightening cycle in a decade.

Given recent data, "it is hard for me to conclude that we have made progress on that objective," Lockhart said. "In its fundamentals, inflation is reflecting what are still, in my view, lukewarm demand conditions... At this point I'm concerned more about a persistent undershoot," than inflation which gets out of hand, as some at the Fed have warned.

He also stated what has become a sort of guiding principle at the Fed under chair Janet Yellen - that it would be worse to raise interest rates prematurely, and potentially damage the recovery, than to wait too long and risk faster-than-desired inflation.

"It would be worse to reverse course because of having made a premature decision than to be patient and run the risk that you are a little late," said Lockhart. "When we begin to change policy we want to have confidence in an outlook."

As a result, even as many analysts have pushed forward their expectations of a Fed rate hike to earlier in 2015, Lockhart said he expected "conditions for liftoff to ripen by the middle of 2015 or later."

Labor markets are steadily but only slowly tightening, he said, with what he regards as full employment only coming in late 2016 or early 2017.

Lockhart's comments give an important insight to the views of Fed centrists over when and how fast to raise interest rates that have been near zero for six years. His remarks appear to buttress those made by other Fed officials this week, such as Chicago Fed President Charles Evans, who feel the Fed needs to be sure the economy can handle any rate hike without slipping backwards. That line of argument is thought to be favored by Fed chair Janet Yellen as well.

Lockhart does not currently have a vote on the Fed's policy-setting committee. But he is among the four regional bank presidents who rotate onto it next year - as is Evans.


(Reporting By Howard Schneider; Editing by Andrea Ricci)