Atlanta Fed President Dennis Lockhart met Saturday with Wall Street Journal reporters Jon Hilsenrath and Harriet Torry on the sidelines of the Kansas City Fed's research symposium in Jackson Hole, Wyo.

Mr. Lockhart was fairly upbeat on the economy, said he's ready to talk about raising interest rates in September, and strongly discouraged the idea that the Fed is considering pushing rates into negative territory.

Here is a transcript of the interview, lightly edited for clarity and length.

MR. HILSENRATH: Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. We're here in Jackson Hole, talking about the economy. So give us your read: How is the U.S. economy doing right now?

MR. LOCKHART: I think the U.S. economy is expanding at a modest pace. The second quarter (gross domestic product) number -- which was 1.1 (percent annual rate of growth), just revised slightly yesterday -- I think overstates the slowdown or a slowdown. We have been looking through that number to an account in the GDP accounts called real final sales, which is GDP less inventory.

And what we see there is a better picture and a more consistent picture over the last few quarters. So I think the economy is chugging along, and I'm not one who is interpreting the headline GDP number as somehow suggesting that we have slowed from what was already a slow expansion.

MR. HILSENRATH: Right. So your view has shifted a little bit from a few months ago, when there were a lot of reservations about Brexit and weak jobs numbers?

MR. LOCKHART: Well, we certainly had a lot of risk elements in the air a few months ago. And when you go all the way back to the beginning of the year, you had a lot of things related to China -- the Chinese equity markets, the Chinese slowdown spilling over to emerging markets -- and then later there was the buildup to Brexit. I think we're past those things, and the overall global risk environment is a bit more settled in my opinion. So I think really, for me, the focus is on the domestic economy.

MR. HILSENRATH: So you're ready to raise interest rates, then?

MR. LOCKHART: I'm ready to talk about it.

MR. HILSENRATH: Right. Tell us what you're thinking? How close are you to being at a level of comfort where you would be ready to pull the trigger on another little move?

MR. LOCKHART: What I have been saying, and I'll say it to you again, is that, knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting. But I am not going so far as to say I think we should do it. I want to see what the next jobs report is. I want to make sure the -- whatever data we have coming in are consistent with that view. But then I think we should discuss it there.

MR. HILSENRATH: So Stan Fischer was out speaking on Friday and suggested there might still be a possibility that the Fed raises rates twice this year. Is that something --

MR. LOCKHART: Well, certainly the calendar would allow that. We have three more meetings.

And I wouldn't take that position today, but I don't rule it out as well. And I believe that we -- probably the conditions will be satisfactory for at least one more.

MR. HILSENRATH: Right. So we will have gotten through 2016 with just one interest rate increase.

MR. LOCKHART: In that scenario. In that scenario, yes.

MR. HILSENRATH: Is that the world we live in now, that we're talking about one a year, given the very low neutral Fed-funds rate, given the slow pace of growth and low inflation? Is that -- is that where we're going to be for the next few years?

MR. LOCKHART: I think the bywords are "cautious" and "gradual" about this economy. And I think the dot plots and the (summary of economic projections) of December that showed four increases was really sort of unrealistic considering the state of the economy.

MR. HILSENRATH: Right. Let's talk about negative interest rates. That's a subject -- it's been a subject of conversation here at this conference, except in the speech of Chair (Janet) Yellen, who didn't even mention the idea. They're trying negative interest rates in Europe. They're trying them in Japan. What's your view on that as a policy tool? Is that a -- is that a tool that in an emergency might be needed here in the United States?

MR. LOCKHART: I don't want to encourage the view that the (Federal Open Market Committee) or the Fed is in any serious way considering negative interest rates for this economy. I view it as an interesting experiment that's going on elsewhere -- fortunately, I think. We'll see what the consequences of negative interest rates and the results that they produce -- we'll see what happens.

But I think we are discussing them -- discussing this policy at this conference more in a theoretical sense. Clearly, you can go beyond zero now. Some people have shown that. But to think of it as something that is being readied for deployment in this economy in the United States, I don't want to encourage that view.

MR. HILSENRATH: All right. Thanks very much, Dennis Lockhart. I hope you get some hikes in at the conference today. Thank you very much.

MR. LOCKHART: Thank you, Jon.

[ End part 1; begin part 2.]

MR. HILSENRATH: All right. So I just want to drill down a little bit on this negative rates -- this negative rates question. What's your assessment, having looked at the experiment in places like Japan and Europe, about the costs and benefits?

MR. LOCKHART: Well, I'll make just two or three points. I'll express concerns that would develop over a period of time.

One is real damage to the financial system through banks and other intermediaries like life insurance companies or insurance companies in general that depend upon fixed-income investments or lending that is priced off of short-term interest rates. Even in our low-rate environment in the United States, we are seeing some of those institutions really express a lot of stress. Charlie Evans and I met with a group of life insurance CEOs a few weeks ago, and they have a broad range of concerns, but certainly their investment earnings are under pressure because of low interest rates. When you go to negative interest rates, you can -- in theory, at least, you can really do some damage to some important industries. So that concerns me.

Do I see any direct evidence of that yet? I think it's probably too early.

MR. HILSENRATH: Can you tell me about the meeting you had with these life insurance CEOs? How did that come about, that you and Evans --

MR. LOCKHART: I have a -- I have a director who is a CEO of a life insurance company headquartered in New Orleans, and he basically orchestrated a meeting that his industry -- they want to have a closer relationship for dialogue on various matters with the Federal Reserve Banks and with the Fed in general, and so we accommodated that request by having a meeting. And (Chicago Fed President) Charlie Evans has a small unit in Chicago that has analytically been following the insurance industry, so that's the reason we had it in Chicago.

MR. HILSENRATH: So you invited Evans to come along?

MR. LOCKHART: You know, well, actually, it was his -- one of his people who organized everything, so it was -- in a way, I started it and then it grew out of Chicago, and then I was invited to it as well.

But my point, simply, is there could be institutional damage over time with negative interest rates, and it bears watching in Europe and Japan.

MR. HILSENRATH: How are the life insurers responding?

MR. LOCKHART: They didn't go into great detail about their investment strategies. They just wanted to stress the importance of the life insurance industry to society, and they also wanted to show us how important they are to the various districts of the Reserve banks via investment in commercial real estate and employment and such. But my overall point is that I would be concerned about institutional damage or damage to industries if you had a really prolonged period of negative interest rates.

The search for yield is a theme that we've been living with for quite some time, obviously -- for literally years. But the drumbeat that I pick up largely from just coverage of different financial market developments, that drumbeat seems to be getting stronger. And I took note recently of coverage in your newspaper, I believe, of the dynamic of Japanese institutions selling off in the bond market in Japan, buying dollars, and investing in U.S. Treasurys for yield on a hedged basis. And the -- and the lesson I took from that is that are some fairly complex patterns of capital flows that are arguably caused by negative interest rate environments in one country, where we're seeing it influence interest rates in our country.

And so that, too, bears watching: What are the consequences for our capital markets for dollar rates because of negative interest rates abroad?

MR. HILSENRATH: Right.

MR. LOCKHART: And that's independent of this question of policy divergence. This is just market effects that occur. So I think it -- we have to be monitoring that as well.

MR. HILSENRATH: So are you concerned that that's exacerbating the reach-for-yield phenomenon here, negative rates in --

MR. LOCKHART: Well, certainly that would be a logical conclusion, because if the capital flows are influencing longer-term risk -- relatively risk-free Treasury rates and such in the U.S., then it just makes the yield environment more difficult for investors here.

MR. HILSENRATH: And, on the ground, where are you seeing this show up? You mentioned commercial real estate. Are there any particular markets that you're concerned about or growing concerned?

MR. LOCKHART: We're monitoring commercial real estate with some intensity right now because cap rates are extremely low. Valuations, particularly of top-quality properties in major markets, are very aggressive. And commercial real estate is one area where, in our supervisory responsibilities, the banks we supervise have some exposure.

MR. HILSENRATH: Do you see much happening at the Board (of Governors) on this front, too?

MR. LOCKHART: The Board basically sets the policy and makes the final decisions on what we are focused on and we then implement. So, yeah, it's the back-and-forth between the Board and the Reserve Banks on --

MR. HILSENRATH: And has this intensified in the last few months? I mean, my sense was there was -- there was a fair amount of worry back in the end of last year, and that it dissipated a little bit in the first half as markets unraveled to some extent.

MR. LOCKHART: I think simply the focus on commercial real estate exposure has become sort of more routine in the last year or so.

MR. HILSENRATH: [ inaudible] -- the exams.

MR. LOCKHART: Not that -- not that -- not that there's been a backing off of focus on it or backing off of attention, but more it's become a routinized part of the process of supervision.

MR. HILSENRATH: Yeah. And so does it come up in specific ways in the regular exam process that you implement?

MR. LOCKHART: Well, when the supervisor is scoping an exam, they're going to focus on what they think are the riskiest area of a portfolio.

MR. HILSENRATH: Right, so they're asking more --

MR. LOCKHART: So, clearly we're looking at commercial real estate.

MR. HILSENRATH: Examiners are just asking more questions about it.

MR. LOCKHART: I can't -- you know, I don't know what happens exactly but I can just tell you it's part of the agenda.

MR. HILSENRATH: Right, right. So it seems like there's a disconnect between the theorists here and the practitioners. So as a -- as a non -- on this question of negative rates, as a non-economist, what do you think it -- these eggheads are saying that -- who say that, you know, in a model this is the way you --

MR. LOCKHART: [ laughs] I'm not going to repeat the characterization of my colleagues who gave the papers. Well, I think what is not easy to theorize is what would be the -- and you know how we use this expression -- the political economy reaction to negative interest rates in this country, particularly if you went as far as one of the papers are suggesting, that paper cash currency would essentially be discounted. It would, you know, be priced such that it's not worth its based value.

Now, if you went that far -- I'm no expert -- but my guess is, there would be a complete uproar, and before we know it there'd be at least legislation proposed to make it illegal to do that. So I think, you know, in the real world you have to factor in the politics of a question with -- whether from a pure economic theory point of view it's going to work.

And that's what I think is the unknown in the negative interest rate. But let me go back to the point I made in the earlier interview. I don't want to be one who's encouraging anyone to believe that this is a serious near or even medium-term prospect in the United States. I just don't see it that way. So I think that the discussion of negative interest rates is a -- perhaps an update and revision of all the literature around the zero-lower bound and an attempt to try to draw lessons from what we see going on elsewhere in the world.

MR. HILSENRATH: Right. Can we -- hey, I don't want to -- if you've got other questions, I know you're --

MS. TORRY: No, no, no, please carry on.

MR. HILSENRATH: Oh, so you were talking outside also about the fear factor. What do you have in mind when you talk -- when you do mean? When you use fear factor, are you talking about central bankers being afraid of confronting the political economy, or are you talking about the public being --

MR. LOCKHART: No, no, I'm talking about the public just being -- finding -- in the United States, when the question comes up and I get the question from public audiences after a speech. Someone will raise their hand and say, "What about negative interest rates?" I've been careful to try to discourage any view that there's a serious prospect of negative rates in our economy in this -- in our country. But starting early this year -- I would say in January -- there was enough discussion of it that it's on the minds -- as a policy possibility on the minds of the people in the public, and I think they worry about not only the policy per se, but what's the state of the world that would create that policy.

MS. TORRY: Do you think that is a more significant -- would that have more of an impact on the economy than the real -- than the negative interest rates themselves, that fear factor, you think?

MR. LOCKHART: I don't know. I mean, I'd have to get someone to think through that question carefully. In other words, you're saying that the fear factor might change consumption patterns or savings patterns or something like that, conceivably.

MS. TORRY: I mean, I think in Germany and some other countries with negative rates, savings rates have actually increased, which is just so counterintuitive.

MR. LOCKHART: I don't rule out that there can be some very counterintuitive results have come out. So -- but that's why I guess I'll just stress that I am treating this as an experiment that we have the luxury to watch from a distance.

(END) Dow Jones Newswires

August 27, 2016 14:07 ET (18:07 GMT)