A hawk on inflation

Editor's update: Since this interview was published in March, Jeffrey Lacker has resigned as president of the Federal Reserve Bank of Richmond after acknowledging he had disclosed confidential Federal Reserve information to an analyst in a 2012 conservation. First Vice President Mark Mullinix is serving as its acting president of the Richmond Fed.

Jeffrey Lacker has been part of the Federal Reserve System’s history for the past 28 years.

In October, he will retire as president of the Federal Reserve Bank of Richmond to spend time writing about that history, including the central bank’s handling of the worst financial crisis since the Great Depression.

As head of the Richmond Fed since 2004, Lacker, 61, has played a significant role in the deliberations of the rate-setting Federal Open Market Committee (FOMC). Fed bank presidents attend FOMC meetings, serving as voting members of the group on a rotating basis. Lacker is not a voting member this year.

“Jeff has made substantial contributions throughout his tenure at the Richmond Fed,” says J. Alfred Broaddus Jr., Lacker’s predecessor as president of the bank. “At the national level, he has been the FOMC’s most persistent anti-inflation hawk.  And during the recent financial crisis, he was the Fed’s strongest voice reminding both his colleagues and the broader public of the longer-term risks that invariably accompany bailouts.”

As a voting member, Lacker frequently has disagreed with positions of the FOMC, which kept interest rates near zero for seven years. In fact, he dissented from the FOMC’s stance at every meeting in 2012.

“In retrospect, some of Jeff’s dissents in the earlier years of the post-crisis expansion may have been a bit ahead of schedule,” Broaddus says. “But if the Fed had moved rates up more rapidly over the last couple of years, as Jeff has advocated, the risk that the FOMC may ‘fall behind the inflation curve’ would be lower than it is currently and may be in the months ahead.” 

The FOMC raised the Fed’s key short-term interest rate by a quarter point in mid-March to a range of 0.75 to 1 percent. The move represents the Fed’s third rate increase since December 2015.

In assessing the danger of keeping rates too low for too long, Lacker has cited the Fed’s mistakes in the 1960s, which allowed inflation to spiral out of control in the 1970s.

Lacker is well-versed in the Fed’s history. He led the committee commemorating the central bank’s centennial in 2013.

His research revealed how little disagreements over the Fed’s powers have changed since 1913. “The debates then about central banking in the U.S. seem very, very current,” he says.

Lacker plans to add his own analysis of Fed history in his retirement, conducting research and writing about the financial crisis.

“It’s going to take a while for [economists] to figure out just what to make of what happened,” he says. “There are some initial versions of history, but I like to point out to people that after the Great Depression, we didn’t really have a good solid narrative account that was economically coherent until 1963.”

Lacker and his wife plan to stay in Richmond, where they live in a condominium in the city’s Fan District.

He also plans to stay involved with a number of Richmond-area nonprofit organizations. The list currently includes the University of Richmond, Council for Economic Education, Venture Richmond, Side by Side, Richmond World Affairs Council and Junior Achievement of Central Virginia.

One of Lacker’s interests is auto racing. When he turned 50, his wife’s birthday gift was a weekend at racing school at Virginia International Raceway in Halifax County. He continues to race as an amateur.

Through racing, Lacker met Roger Penske, a well-known former driver who owns racing teams and several other automotive-related businesses.

Penske’s operations are known for “just immaculate execution,” Lacker says.  “I told him that I used him as an example at the bank.  When a sports car’s racing for 24 hours, you’ve got to be pretty reliable. When you move trillions of dollars every day, you’ve got to be pretty reliable, too.  That’s professionalism and focus on execution.”

Virginia Business interviewed Lacker in early February at his office in Richmond. The following is an edited transcript.

Virginia Business:  Why did you decide to retire?

Jeffrey Lacker:  I’ve been at this quite a long time.  This is my 13th year [as president of the Richmond Fed]. I’m the second-longest serving current member of the FOMC[Federal Open Market Committee].  I’d like to get back to research and do some writing.  I’ve been through some really amazing and really extraordinary events in the history of the Fed and in the financial crisis.  I know a lot’s been written.  I know there’ve been a lot of memoirs and everything.  I want to write down what perspectives I’ve taken away from it for the interest of posterity, future historians and future economists in case they find it useful.  It’s going to take awhile for [economists] to figure out just what to make of what happened.  There are some initial versions of history, but I like to point out to people that after the Great Depression, we didn’t really have a good solid narrative account that was economically coherent until 1963, with the publication of Friedman and Schwartz’s “A Monetary History of the United States.”  I’m hoping it doesn’t take quite as long for economists to develop an understanding of what went on in the crisis, but it might. 

VB:  What do you think is your greatest accomplishment in your time here?

Lacker:  The thing, I think, that’s going to have the most lasting value that I had a hand in is the work that we’ve done around the Federal Reserve System’s centennial [in 2013] and the work that’s followed.  I chaired the sponsoring committee for the system’s collective commemoration of the centennial, and there’s a little video online to check out on that.  We gathered almost all the living current and former FOMC members… [Former Fed Chairmen Paul] Volcker, [Alan] Greenspan and [Ben] Bernanke were there and gave speeches.  It was just a thrill to be a part of that … Our work on the centennial involved some work to make the Fed’s history more accessible to Americans. We put together a website with a lot of introductory material so you can  dip in and get to know various events and various people in our history. As part of doing that, we also realized that there’s a lot we can do to improve how we organize and preserve historical materials for the use of historians or other members of the public in the future …  The Bank of England has ledgers going back to the 1700s.  Because of who we are and where we are in the economy, we need to be accountable in making ourselves and our history available to the public. I think that work is likely to have value 20 to 30 years from now.

VB:  Was there anything that you came across, in doing all that research, about the Fed’s history that surprised you or something that you didn’t really know before?

Lacker:  Yeah, absolutely.  Since the crisis, there’s been just an extraordinary amount of political attention devoted to us.  There have been a lot of critics, very sharp critics, on the left and the right…The surprising thing for me is that, when you look at the founding of the Fed, the debates were almost the same.  There was an original proposal for one reserve bank, but people like Carter Glass [a powerful Virginia congressman who later was Treasury secretary under President Woodrow Wilson] and others around the country were worried that that would result in an institution that was too heavily influenced by New York banks.  They wanted a decentralized system, 12 different banks.  There was debate about the role of the government.  Should this be a government-owned bank?  They decided against that because that was typically an inflationary arrangement. Instead, they opted for this set of banks modeled on city clearinghouses…where the banks are owned by their members, who populate the board,  [and they] combined that with a layer of oversight motivated by Wilson and the progressives…So the Board of Governors was this agency that monitored what the reserve banks were doing.  The debates then about central banking in the U.S. seem very, very current. It’s surprising how deeply that runs in American politics.

VB:  What’s your biggest disappointment?

Lacker:  The recession of 2008 and 2009 turned out very badly, and the big debate is:   Could we have softened the blow if we’d played our hand differently?  That’s one of the things that I’ll be wrestling with, trying to shed some light on it in the future.

VB:  Will you miss the opportunity to be a voting member of the FOMC next year?

Lacker:  I’ve voted a fair amount already, and I’ve gotten a lot of practice voting yes and a lot of practice voting no.  I think I’ve come to accept that I can do without voting.  I had mandatory retirement that I was facing in 2020.  There’s a provision of regulations about the reserve banks that we all have to retire at age 65 unless you’re appointed after age 55, which isn’t the case for me. 

VB:  You became president of the Richmond Fed in 2004; how’s the job changed?

Lacker:  Before the crisis, outreach to legislators, particularly federal legislators, was just not an important part of my job …A lot of people were aware of the Fed in 2004.  We had our critics and our allies, but there wasn’t any serious legislation [pending]. But now there is the Dodd-Frank Act.  Starting in ’09, there were legislative proposals that would have a substantial effect on us.  I’ve had to do a lot of outreach on Capitol Hill to help legislators understand who we are,  what we do and why we do what we do. That has been a really important part of the job.  The biggest change is the legislative agenda.

VB:  Now you mentioned Dodd-Frank.  I wanted to talk about that.  There’s talk now of dismantling Dodd-Frank.  What are your thoughts on that?

Lacker:  Well, I’m sort of surprised we haven’t done this earlier.  Usually, with a piece of legislation that is as large and sprawling, that touches as many things as Dodd-Frank, there’s a technical corrections bill a year or two down the pike to clean up some stuff.  Now, what seems to be [considered] is a wholesale recalibration.  At least that’s what some in Congress are talking about.  For my money, it’s a big piece of legislation, in many respects untested, particularly the parts having to do with the failure of large financial institutions.  I had very serious questions and reservations about some parts of the bill, which seem to be getting re-examination, and so I welcome the debate on that.  There’s a lot of tension in what’s going on in Congress on the regulations that ramped up in Dodd-Frank. Some of those, I think, are really good, and I’d hate to see them rolled back.  I think the liquidity regulations have been really important.  I think the stress tests have been really very valuable.  If they can be improved through greater transparency, I think that could be useful. I’m in the mode to not “throw the baby out with the bathwater,” but definitely sympathetic to the notion that there might be improvements available.

VB:  Back to talking about now versus then, when you started:  How’s the economy different?  Is it in better shape?

Lacker:  I think average standards of living, over the whole population, have improved.  The labor market’s in even better shape than it was in 2004 in the sense of how many people who want a job are gainfully employed.  I think there are a lot of positive developments to point to.  If you look at consumers’ situations, there’s an array of products that weren’t quite available then.  I think the financial system is a little more stable.  Before, we were on the cusp of very dangerous mortgage-lending practices.  I think that risk is substantially diminished.  Households seem to have taken onboard that the world’s a riskier place than maybe they thought it was in 2004, and there’s a certain level of caution among households and businesses about overextending and taking on too much debt.  I think that’s a useful thing.  I think it’s definitely the case that if you asked economists or policymakers back in ’04 where we’d be in 2017 and showed them where we actually are, I think a lot of people would be disappointed.  That’s because productivity growth, the growth in per-capita standards of living, has fallen short of what in ’04, I think, a lot of people were expecting.  That’s a deep secular puzzle that economists are wrestling with.  It will probably be a couple decades before they figure that one out, too.  We’re better off than we were, but not as much better off as we expected we would be.

VB:  The Fed is talking about raising interest rates [again] this year. Has it waited too late?

Lacker:  I hope not.  If you told me a year ago where we’d be now, I would have said, “That’s a little behind.”  I’m heartened, I think, that the tone of the data in the last couple of months has changed the picture about interest rate increases.  I see broader support for rate increases, more numerous rate increases, this year than certainly last year or the year before.  I don’t think we’ve missed the bus.  I think it’s important for us to act in a timely way this year to prevent having to scramble later on, should there be duress.

VB: What is the biggest threat facing the U.S. economy?

Lacker: There is always the possibility of some short-term disturbance that dampens growth for a while. Usually these take the form of a sharp unexpected fall in spending by some sector. I don’t see any sign of that type of disturbance on the horizon right now, although by their very nature, disturbances of this type are unforeseen. And our economy is generally able to absorb such shocks and make up most of the lost ground. I think the larger threat to the U.S. economy is that productivity growth remains depressed. There are various views about why productivity growth is so low right now and what can be done. But if we don’t address that problem or it doesn’t fix itself over time, the consequences for the income of the average American could be substantial.

VB:  You’ve been known as a dissenter and an anti-inflation hawk on the FOMC.  Who takes your place?

Lacker:  That’s a good point.  We don’t really staff it.  It’s not like we’re going to be down a tight end or something like that.  It doesn’t really work that way.  I think the concerns and the risks that have motivated me in the past, I think, are concerns and risks that are understood by several other members of the committee.  I’ll let them speak for themselves.  I’m confident the committee will hear the voices that will raise concerns that I would have raised.