dennis lockhart : considerations on the path to policy normalization speech by mr dennis lockhart, president and chief executive officer of the federal reserve bank of atlanta, at the southwest florida business leaders luncheon, naples, florida, 6 february 2015. * * * • atlanta fed president and ceo dennis lockhart, in a february 6, 2015, speech to the southwest florida business leaders, shares his thoughts on the monetary policy “ liftoff ” decision ahead. • lockhart says the linchpin in a decision to make a significant policy change is confidence in the economic forecast. • lockhart ’ s baseline outlook for 2015 and 2016 assumes growth at around 3 percent per annum. • in lockhart ’ s view, this outlook, combined with the improvement of economic conditions to date, indicates the economy is on a path to a satisfactory and desirable state of health. • lockhart says that the weakness of inflation and wages is a concern, and that firming of inflation readings will give him confidence that the outlook on which monetary policy decisions will swing remains realistic. • from a main street perspective, lockhart says, the important point for business planning is that monetary policy is likely to shift sometime this year, and that decision should be a signal that the fomc is confident that the economy is on track to achieve its objectives. i want to begin by expressing thanks to gary tice for his service on the federal reserve bank of atlanta ’ s miami board. gary follows gay rebel thompson from this community, who earlier served as a board member and chair of the atlanta fed ’ s board for south florida. this year – 2015 – is widely expected to be the year the federal reserve initiates normalization of monetary policy. this prospect has generated a lot of interest and buzz. if you follow the fed - watching industry, as i do, you are well aware that a top - of - mind question regarding policy is : at what meeting will the fed decide to lift off? at what meeting will the federal open market committee ( fomc ) raise the policy rate target above its current near - zero range? if you are an investor in fixed - income or interest - paying assets, a lot of money may ride on the precise answer to that question. in contrast, if you are a business person operating in the nonfinancial real economy, you may be less concerned about the precise timing of the first policy adjustment. you are likely to be more concerned about what a change in the interest - rate

still restrictive as it stands – meaning it is imparting downward pressure on demand, with some households and businesses having to refinance loans at higher rates than before. but the tightening in bank rate since 2021 won ’ t do much more to activity in growth or levels terms as we look ahead. so following a period where the outlook has been dominated by the unwind of past shocks, if we could press pause on new shocks hitting the economy, we would be entering a period of relative calm ( a big if ). one important exception to this general rule is second round effects in the labour market. there is uncertainty about how quickly these second - round effects will dissipate. [ 21 ] i would expect a continued unwind of past shocks, as lower headline inflation translates gradually into lower wage growth and this eases the pressure on price setters to pass on higher labour costs into prices. second, there are new shocks hitting the economy. it is always difficult to work out what these are, but some are easier to identify than others. for example, we now expect the budget to lead to a near - term boost in demand relative to previous expectations, to be followed by a planned consolidation. we were also reminded just before christmas that private sector wage growth remains high, and employment costs will be increased further by the changes to national insurance contributions ( nics ) that will be implemented in april and the large increase in the national living wage at the same time. businesses have many potential margins of adjustment to increased nics. at one extreme, they might respond by passing the entire cost through into lower wages – indeed, this would be my assumption for where it ends up in the long run. at the other extreme, they might seek to protect wages and increase prices, especially in the short term. they might also respond by reducing employment or by eating into their profit margins. the reality will sit somewhere between these extremes and will depend on the specific circumstances that each business finds themselves in. whether employers can pass on higher costs to consumer prices will depend on the overall demand environment in the economy. there is therefore uncertainty around what these shocks will mean for medium - term inflation. but they are likely to be considerably smaller than the large shocks of the recent past. what explains the slowing in activity? zooming out from the specific drivers, it is increasingly clear that the data is pointing to a slowing in economic activity in the uk. chart 5 offers one window into that. it shows the news in the