Street cred is as important to central bankers as it is to any neighborhood tout ? and is a prime way to control inflation.
Richmond Federal Reserve Bank President Jeffrey Lacker told attendees at yesterday?s Greater Baltimore Committee business conference that the best way to gain such credibility is for the Fed to establish an “explicit numerical inflation target” ? and then key monetary policy to that goal.
Lacker, a voting member of the short-term interest rate-setting Federal Open Market Committee, is a conspicuous dissenter to the central bank?s current hold on rate increases, because, he said, inflation remains unacceptably high ? even by the Fed?s standards.
Lacker said despite this acknowledged condition, the full committee recently halted its inflation-damping rate increases at 5.25 percent ? a logical disconnect that an explicit inflation target would help rectify.
“Money is intrinsically useless,” Lacker explained. “The current value of money is what people expect it to be in the future ? and expected future inflation can cause future inflation.”
Pointing to the Fed?s new openness policies ? its signals, promptly published meeting minutes and rate action remarks ? as illustrative of this “walking the talk” concept, Lacker nevertheless insisted that a rate-governing, explicit inflation target was still needed.
“Monetary policy is all about communication,” he added. “Anything we can do to shape people?s perceptions and expectations [is important]. Words and subsequent deeds must be consistent.”
Turning to the recent downturn in the housing market, he said that the data may be stabilizing but remained “choppy.”
Lacker said he believes, however, that there would be no “catastrophic” collapse in the housing market.?
“The U.S. economy is currently in a period of transition,” Lacker said, noting that such indicators as consumer spending, job growth and capital investment continue to signal strong economic growth.
He added, however, that with core inflation (the index stripped of energy and food costs) above 2 percent for the last few years, the inflation outlook remains “troubling.”
