Richmond Fed president: Indicators suggest rates should be higher

The president of the Federal Reserve Bank of Richmond says economic indicators suggest that short-term interest rates should be higher.

Waiting too long to raise that could pose problems for the economy, he believes. “The way the data is playing out, I think the longer we wait there is a material increase in risks that we run,” Lacker told reporters Friday in Richmond after speech to Virginia economists.

The Fed Reserve reduced rates to nearly zero in December 2008 during the Great Recession. Rates didn’t change until last December when the Fed increased them a quarter of a percentage point.

That move was expected to be the first of four quarter-point increases this year, but those plans were derailed by the economy’s slow performance during the first half of the year.

A voting member of the rating-setting Federal Open Market Committee (FOMC) last year, Lacker twice dissented when rates weren’t raised at two meetings before December. He is not a voting member this year, but still will have a chance to offer his perspective at the next FOMC meeting on Sept. 20-21.

Lacker shot down speculation that the Fed might avoid making any changes at the meeting because of the upcoming presidential election. “That’s a misconception,” he told reporters. “I don’t see the election having any effect.”

He also didn’t buy the idea that a Labor Department’s jobs report released on Friday might make the Fed more hesitant to act. The report showed 151,000 jobs were added to the economy in August, fewer than some observers had predicted, but “still a strong report,” Lacker said. The national unemployment rate remained 4.9 percent.

The direction of the U.S. jobless and inflation rates were central to Lacker’s message Friday to a combined meeting of the Virginia Association of Economists and the Richmond Association for Business Economics on the 23rd floor of the Richmond Fed.

Lacker noted how the “Taylor rules,” an algebraic formula created by Stanford University professor John Taylor in 1993, demonstrate the effectiveness of Fed policy decisions since the 1960s. The formula shows that the Fed responded in a timely fashion to inflationary pressures from the early 1980s to 2007, helping to keep inflation under control. By contrast, the Fed failed to react strongly to inflationary warning signs in the 1960s and 1970s.

“This was a period in which the Fed succumbed to political pressure to keep policy too accommodative,” Lacker said. “When inflation surged as a result, the Fed raised rates precipitously enough to send the economy into recession. This period of ‘go-stop’ monetary policy, as it was called, was brought to an end by the strong anti-inflation policy stance of the [FOMC led by Fed Chairman Paul Volcker].”

Failure to act decisively also can undermine the Fed’s credibility, he said.

“Indeed, a major lesson (perhaps the major lesson) that emerged from the macroeconomic experience of the 1970s is that expectations can become unhinged when the public loses confidence in the willingness of the central bank to take the actions necessary to keep inflation under control,” he said.

The current inflation and unemployment rates have reached levels that indicate rates should be higher, Lacker said but added he had not decided what his position will be at the next Fed meeting.