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Markets overlook US strength, overreact to China: Fed's Lockhart

Investors that have roiled global markets and thrown Federal Reserve policy off track should focus on the strength of the U.S. economy rather than the more remote risks of a global slowdown, Atlanta Federal Reserve bank president Dennis Lockhart said on Wednesday.

"Markets should first look at our characterization in the (Federal Open Market Committee) statements and in individual speeches of the economy really being on solid ground and performing well," said Lockhart, who supported last week's decision by the Fed to delay an interest rate hike but still says he expects to vote to raise rates some time this year.

His comments come a day before Fed Chair Janet Yellen delivers a high-profile speech on inflation, a topic that has divided policymakers who worry recent readings show a weakening economy from those who are confident inflation will rebound as the United States continues to grow.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.
Scott Eells | Bloomberg | Getty Images
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.

The issue is central to the timing of a first rate hike because one of the Fed's policy targets is a steady inflation rate of 2 percent, still substantially beyond recent levels. And its policy statement says explicitly rates should not be raised until there is confidence inflation will pick up.

Yellen will have to reconcile the Fed's disparate views at a time of unusual uncertainty in global markets. China, a bedrock of global growth for much of this century, is in the throes of an unexpected slowing. Coupled with tepid growth in Europe, Japan and elsewhere, there is concern the United States could be dragged down as well.

Weak Chinese manufacturing data on Wednesday triggered a drop in U.S. markets, another example of the volatility that prompted the Fed last week to delay what had been an expected rate hike—its first in nearly a decade.

Lockhart said he thought worries about the state of the global economy had become exaggerated, and were given too much weight over continued growth, healthy consumption and other U.S. strengths.

"China is slowing to still a very respectable pace of growth. It is ratcheting down a little bit, but there is a decent chance that the world is overreacting," he said.

"Markets should appreciate that the likelihood of substantial spillover to the U.S. domestic economy from developments abroad...is likely to be small," he said.

Concern about China, the sharp drop in U.S. equities, and the possibility that might cause a broader U.S. slowdown led the Fed last week to hold off on its long-debated rates liftoff.

That decision itself has contributed to uncertainty about the path of Fed policy, with investors pushing expectations of an initial rate hike ever-deeper into 2016 even as policymakers say they remain intent on hiking rates this year.

The situation has led to some of the most pointed criticism yet of Yellen, who steadily guided a "data dependent" central bank towards a rate hike as the U.S. economy improved, only to pull back at the last minute even though nothing fundamental changed in the U.S. outlook.

Cornerstone Macro analyst Roberto Perli said Yellen's speech on Thursday in Amherst, Massachusetts, will offer an important opportunity for her to clarify where the Fed stands.

Yellen has allowed expectations of a rate hike to build, he said, and now she needs to "either evaluate those expectations or...try to steer markets in a different direction by providing some rationale for whatever (she thinks) is the right thing to do at this point."