One on One With Jeffrey Lacker, president of the Federal Reserve Bank of Richmond
Tuesday, September 05, 2006
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SUSIE GHARIB: Federal Reserve policymakers meet in two weeks to decide what to do about interest rates. One of those policy makers joins us this evening, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. He was the sole member of the central bank who favored a rate increase at the last meeting in August, while his colleagues voted to pause. Mr. Lacker, welcome to NIGHTLY BUSINESS REPORT.
JEFFREY LACKER, PRESIDENT, RICHMOND FEDERAL RESERVE BANK: Thank you, my pleasure.
GHARIB: Well, as I just mentioned, you dissented in the August meeting. I`m just wondering now, based on new economic data that you have been looking at, do you still see risks of inflation in the economy?
LACKER: I dissented because in my view, my assessment at that meeting was that we needed another rate increase in order it be sure that inflation came down sufficiently rapidly. I`ve been concerned about core inflation for some time. It`s been above 2 percent for a couple of years now. Since this winter, it`s been running at closer to 2 3/4 percent the way we like to measure it. The danger in letting it go on so long is that inflation becomes entrenched at levels around where they are now, and the longer we let it go on, the greater that danger. I and several of my colleagues have expressed a desire to see inflation around 1.5 percent. We view that as consistent with price stability. And the longer we let inflation go on, so far above 1.5 percent, the danger that it gets entrenched up there and we have to take stronger action.
GHARIB: So it sounds like, from what you`re saying, you still think that there should be rate increases at the September 20th board meeting.
LACKER: Well, I`ll make an independent assessment at the September meeting as I see the data then. I`ve seen the data since our last meeting. The July CPI and PCE price index numbers were a little lower than we had been seeing earlier this year. I don`t think we`re out of the woods yet. I don`t think one month`s number makes a trend, and I`d like to see a more firm establishment of a downward trend in core inflation before I -- I become less anxious, let`s say.
GHARIB: Wall Street`s analysis of the Friday employment report was that it showed that the economy isn`t growing too fast and it isn`t weakening so much either, so the prevailing view on Wall Street is that the Federal Reserve doesn`t need to raise interest rates, and they can hold off on raising rates. Is there something that the market is missing or do they have it right?
LACKER: I won`t question whether they`ve got it right or not. The broader context is that growth is moderating now, has moderated. We`ve been -- we`ve had three years of fairly strong growth as we`ve eliminated a lot of slack and resource use in the economy. And now as we expected would happen eventually, we`re settling down to growth at around the economy`s potential growth rate. We`re going to see it fluctuate around potential in the next few years. I think it`s likely to be slightly below potential for the next couple of quarters. We`re seeing some softness in housing. But there`s -- there`s growth in business investment spending and consumer spending has held up pretty well as well. Employment growth at around where we saw the payroll employment report last week is, in my view, consistent with growth and potential.
GHARIB: You mentioned earlier, as we were just talking, that the reason why you wanted to see a rate increase is that you`d like to see inflation coming down rapidly. What do you mean by rapidly? Is there any time frame that you`re talking about?
LACKER: I wanted to see inflation return back to between 1 and 2 percent more rapidly than would otherwise be the case without a rate increase at that meeting. Having said that, I hope my colleagues are right in that we didn`t need a rate increase then. But I`d be unhappy if inflation was much above 1.5 percent at the end of next year.
GHARIB: Some economists who I have spoken with said that there is a risk that if you continue -- if the Fed continues raising interest rates, there is a risk of recession to the economy. Would you be willing to tolerate a recession in order to bring inflation down more rapidly?
LACKER: I don`t think a recession is likely and I don`t think further rate increases to rein in inflation would appreciably raise the risk of a recession. At this point, I think the greater danger to the real economy is that inflation expectations become entrenched, up at an elevated level and we have to take firmer action later in order to bring inflation down.
GHARIB: Do you think that the economy has been at risk because the Federal Reserve did not raise interest rates at that August meeting? LACKER: Well, I think -- I think we can still weather this. I think there`s -- I`m hoping my colleagues are right and that inflation does subside in the next couple of quarters. So I -- I don`t see -- you know, I don`t see that risk.
GHARIB: There`s there seems to be some disagreement within the Fed between those who are happy with current policy and those who aren`t. Do you see yourself as the leader of the inflation hawks?
LACKER: We make our own independent assessments. I`ll let my colleagues speak for themselves. I`ve always placed importance on our price stability objective. It`s the one thing the central bank can control on a sustained basis over time. And I think it`s where we need to focus our policy now.
GHARIB: Mr. Lacker, thank you very much for coming on NIGHTLY BUSINESS REPORT". We really appreciate hearing what you had to say about the economy.
LACKER: Thank you very much for having me on, Susie. It`s been my pleasure.
GHARIB: We have been speaking with Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.
