Fed's Lockhart - Brexit, uncertainty, require patience on rates

The US Federal Reserve should remain "cautious and patient" with any future interest rate increases as the fallout from the recent Brexit vote becomes clear, Atlanta Federal Reserve Bank president Dennis Lockhart said, adding weight to a core of US central bankers who appear poised to remain on hold.

In prepared remarks for delivery at an economic conference here on Thursday Lockhart said it was clear to him that the United Kingdom's decision to leave the European Union was not a "Lehman moment" of systemic importance to the global economy.

But he noted that a third of businesses his staff surveyed following the referendum said it "made their sales outlook more uncertain. They indicated they would be more cautious in hiring and capital spending decisions as a result of Brexit."

The immediate impact on the United States is likely small, he said, but "the consequences of Brexit may play out over a number of years, and the associated uncertainty could become an economic headwind."

"I don't believe the (Federal Open Market Committee) is behind the curve in the setting of the policy rate. For that reason, I'm comfortable with a cautious and patient approach to policy in the near term," Lockhart said at the Global Interdependence Center's Rocky Mountain Economic Summit, a gathering of economists and investors. "Sometimes you just have to take some time and let the waters clear."

Lockhart did not say how long it may take to get clarity, but his comments show the stark shift in expected policy that has taken place at the Fed since it raised rates in December for the first time in a decade. At the start of the year, Lockhart was among the many Fed officials who anticipated raising rates four times this year.

The Fed's median rate outlook has since fallen to two increases this year, and many investors believe that is optimistic, with one or none seen as more likely.

Lockhart said the US economy on its own is doing well, with growth still anticipated at 2 per cent, an improving labour market, and "brisk" consumer spending. He said he expects the Fed's 2 per cent inflation and full employment goals to be met next year.

That doesn't mean rate hikes are in the offing.

"It's too early to sound the 'all clear,'" Lockhart said. "Elevated and protracted uncertainty will not help growth prospects of an economy constrained by low business fixed investment...Uncertainty that reduces business fixed investment activity is not helpful."