Fed’s Lockhart: Prolonged Shutdown Makes October Taper Less Likely

A government shutdown that drags on for days or weeks would make the Federal Reserve less likely to begin winding down its bond-buying program at its October meeting, Federal Reserve Bank of Atlanta President Dennis Lockhart said Thursday.

“If this lasts for several more days” or weeks, Mr. Lockhart said, “by the end of October we will still be looking at a very ambiguous situation.”

Mr. Lockhart, who doesn’t currently serve as a voting member of the Fed’s policy-making Federal Open Market Committee, said the loss of economic data due to the shutdown makes it more difficult to evaluate the state of the economy and “compound[s] the murkiness of the situation.” He particularly highlighted the delay of the monthly jobs report, which was scheduled for Friday but has now been delayed.

“Less data is not helpful in gauging where the economy is and where it’s going,” Mr. Lockhart said Thursday. “So that would tend to make me somewhat more cautious.”

Speaking on the sidelines of a conference hosted by the Atlanta Fed, Mr. Lockhart said he was watching private-sector data such as this week’s ISM reports and yesterday’s jobs estimates from payroll processor ADP. But he said there is no replacement for government data, which he called “essential.”

But Mr. Lockhart said it’s still possible the Fed will act at its meeting at the end of the month.

“I think there are circumstances in which it could be a decision meeting,” Mr. Lockhart said. “There’s no reason to take it off the table.”

Mr. Lockhart said the Fed hasn’t changed its criteria for beginning to wind down bond purchases, and said it is “still conceivable” that the process could begin this fall. “But we will have to see how these fiscal deliberations play out,” he said.

Beyond the loss of economic data, the shutdown could also act as a drag on economic growth, Mr. Lockhart said.

“It’s a little early to draw any conclusions,” Mr. Lockhart said. “If it’s protracted then I would expect that there would be some measurable impact at least on fourth-quarter growth.”

Mr. Lockhart added that the shutdown “vindicated” the Fed’s surprise decision not to begin tapering at its September meeting.

Mr. Lockhart said that the shutdown and similar recent Washington crises could also have longer-term impacts.

“It just simply makes our economy look more prone to politically induced shocks and politically induced turbulence and that undermines long-term confidence,” Mr. Lockahrt said.

Mr. Lockhart said the Atlanta Fed is also preparing for the possibility that the U.S. breaches the debt ceiling later this month, although he provided no details.

“Some rehearsal activity will take place to ensure that we’re prepared for whatever kind of contingency develops,” Mr. Lockhart said.