“I was surprised a couple months ago at the probability market participants seemed to ascribe to further easing,” Lacker, a voting member of the Federal Open Market Committee (FDTR), told reporters and editors today at the Bloomberg News Washington bureau. “While further easing is obviously something that’s conceivable, I wouldn’t favor it unless conditions deteriorated quite substantially” for growth and inflation.
Stocks and commodities continued their decline for a second day after the minutes of the FOMC’s March 13 meeting called for easing only “if the economy lost momentum” or if inflation fell below its 2 percent target. The Standard & Poor’s 500 Index lost 1.1 percent to 1,397.66 as of 2 p.m. in New York, after a 0.4 percent decline yesterday. The S&P GSCI gauge of commodities retreated 1.7 percent after falling 0.4 percent yesterday. The yield on the ten-year Treasury fell to 2.24 percent from 2.30 percent yesterday.
Lone Dissent
Lacker cast the sole dissenting vote on the FOMC’s March 13 statement that U.S. economic conditions will probably warrant “exceptionally low” levels of the federal funds rate at least through late-2014. The central bank may need to raise interest rates next year to avert “inflationary pressures” as the economy expands, Lacker said in a March 16 statement.
The Richmond Fed chief said today interest rates will probably need to be raised as a “preemptive” move against price increases. “We don’t want to wait until inflation is broken out to raise rates,” he said.
Inflation will probably increase at “around 2 percent over the next couple of years,” Lacker said. “To maintain our credibility I think we need to be looking to raise rates before inflation pressures” build, he said.
Policy makers are holding off on increasing monetary accommodation unless the economic expansion falters or prices rise at a rate slower than its 2 percent target, according to minutes of their March 13 meeting released yesterday.
The March minutes show decreased urgency to add stimulus and no sentiment expressed for additional easing without deterioration in economic conditions. The central bank also affirmed its plan, first announced in January, to hold interest rates near zero at least through late 2014.
Primary Dealers
The New York Fed’s survey of primary dealers conducted before policy makers met last month showed that the firms saw the probability of another round of bond buying declining from January.
The median respondent saw a 50 percent chance that the Fed would expand its balance sheet through securities purchases within one year, down from 55 percent odds in the survey conducted before the FOMC’s Jan. 24-25 meeting, results released today by the New York Fed showed.
Lacker said he expects gross domestic product to increase between 2 percent and 3 percent this year. “Growth is likely to pick up next year to above 3 percent and employment growth will pick up commensurately and that’s the basis for my expectation that we’re likely to find it warranted to raise rates some time next year,” he said.
Economists estimate that GDP will increase by 2.2 percent this year and 2.4 percent next year, according to the median of 72 estimates in a Bloomberg News survey.
Downside Risks
“Downside risks have diminished now relative to where they were say four or five months ago, and I think the inflation picture is looking better,” he said in an interview on Bloomberg Television’s “Street Smart” with Trish Regan which will air today. The rising price of gasoline “looks as if it’s going to be a transitory uptick in overall inflation.”
Policy makers at last month’s FOMC meeting raised their assessment of the economy as the labor market strengthened and refrained from taking new action to cut borrowing costs.
The best six-month streak of job growth since 2006 prompted Fed Chairman Ben S. Bernanketo acknowledge an improved path for the economy, even as policy makers repeated that unemployment will probably stay high enough to warrant keeping borrowing costs “exceptionally low” at least through late 2014.
Unemployment Rate
“The unemployment rate has declined notably in recent months but remains elevated,” the FOMC said its statement. It also said “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.”
Lacker, 56, has been president of the Richmond Fed since 2004 and is the second-longest serving among all 12 regional bank presidents after Cleveland’s Sandra Pianalto. Lacker was an assistant professor of economics at Purdue University in West Lafayette, Indiana, before joining the Richmond Fed in 1989 as an economist in the research department.
The district bank chief also said he objects to any suggestion that the Fed would ever “print money to keep the interest expense on the debt down” for the U.S. government and that “in no way should our policy be influenced” by mounting fiscal shortfalls.
Lacker also said the Fed must remain independent from electoral politics and criticism from lawmakers.
Election Platform
“To make it part of your election platform, to yank around this institution is, I think, bad policy” he said. “We don’t run monetary policy for Democrats or for Republicans. And I’d be much more comfortable if the political parties in their battles with each other over legitimate and important issues in our country left the Federal Reserve out of it.”
Lacker said former Chairman Paul Volcker ensured the Fed’s credibility by raising borrowing costs to a high of 20 percent in 1980 to tame inflation. Maintaining that credibility since then “has been an art form” and the central bank should be given more credit for “successfully” keeping inflation at an average of about 2 percent over the past 18 years, he said.
“Paul Volcker solved the problem in a different way and a very useful way by just demonstrating that we were willing to take the heat,” he said. “We were willing to endure a significant recession that we caused in order to bring prices under control, bring inflation under control. And that did it. That cemented our credibility.”
To contact the reporters on this story: Joshua Zumbrun in Washington atjzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
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