Fed's Lacker says raising interest rates is needed now
Washington (Sept 20) Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, reiterated Saturday that the central bank should end the era of record-low interest rates, saying that delaying raising rates further is not warranted and could create “adverse outcomes” for the economy.
“It’s time to recognize the substantial progress that has been achieved and align rates accordingly,” Lacker said in a posting on the bank’s website in explaining why he was the lone dissenting vote on the Federal Open Market Committee on Thursday that kept interest rates at historic lows.
“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook,” Lacker said. “Further delay would be a departure from a pattern of behavior that has served us well in the past. The historical record strongly suggests that such departures are risky and raise the likelihood of adverse outcomes.”
Lacker is a voting member of the Federal Reserve’s policy committee this year. The last time he was a voting member was 2012, as a part of the rotation among Fed regional bank presidents.
The eight other voting members said Thursday that a further delay was warranted, Fed Chair Janet Yellen said. Most of the policymakers, though, still expect to raise rates before the end of the year.
The Fed will next meet in October and then in December.
Lacker said he wanted the Fed now to move up the federal funds rate — which controls the interest that banks charge one another — by a quarter-point from its current range of zero to 0.25 percent.
“Even after a quarter-point increase, interest rates would remain exceptionally low, providing ample support for economic growth,” Lacker said. “This expansion has been disappointing by some measures, when compared to historical averages. Nevertheless, U.S. economic conditions have improved quite significantly over the last six years, all things considered.”
Lacker argued again, as he did two weeks ago in a speech in Richmond titled “The Case Against Further Delay,” that the U.S. economy is strong enough to support a small increase in rates.
Household spending has grown in the last couple of years, and labor market conditions have steadily improved, he said.
“Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets,” Lacker said.
The Fed, he said, should act ahead of potential inflationary pressures. Inflation has been running between 1 percent and 2 percent, below the Fed’s stated goal of 2 percent, but was held down late last year by declining oil prices and appreciation of the dollar.
But since January, Lacker said, inflation has approached the 2 percent mark, even though falling oil prices and the devaluation of the dollar in recent weeks have renewed downward pressure on inflation.
“As with last year’s episode, this disinflationary impulse is likely to be transitory. So I remain confident that inflation will move back to the FOMC’s 2 percent objective over the medium term,” he said.