Federal Reserve Bank of Richmond President Jeffrey Lacker on Friday presented a forceful case against any further delays to the central bank’s decision to raise interest rates, and argued that hiking rates at the mid-September meeting is the right call.
“I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring,” Lacker said in a speech delivered in Richmond, Va., Friday morning. “It’s time to align our monetary policy with the significant progress we have made.”
Lacker, a voting member of the Fed’s monetary policy committee, is known as one of the most “hawkish” members of the Fed system. That is, he is among those most worried about keeping money too loose and generating inflation or financial bubbles.
He said that his comments Friday were merely an exercise in laying out the case for tighter money, and that he would not make up his mind until he meets with other Fed members at the meeting in Washington.
Nevertheless, his arguments clearly indicate that Chairwoman Janet Yellen could face a dissenting vote at the meeting if the decision is not to raise rates. It would be the first dissent of the year.
Lacker’s argument hinged on the fact that he believes the Fed is on track to meet the two terms of its congressional mandate, namely fostering full employment and maintaining stable prices. He also rejected the idea that recent stock market volatility is a reason to delay.
The economy has added 12 million jobs since employment bottomed out in 2010, he noted, and many indicators of the labor market continue to show improvement.
Some members of the Fed have argued that inflation near zero in recent months is well below the Fed’s 2 percent goal, and cause to keep rates lower for longer. Lacker responded Friday that according to the inflation measure preferred by the Fed, inflation has been at 2.2 percent since January. “The last half year of data show that inflation already has returned to our 2 percent objective,” he said, noting that last year’s collapse in oil prices temporarily held down inflation before.
As for stock market turbulence, Lacker acknowledged that he could not predict what would be the outcome of recent fears about growth in China and related financial market turbulence. But he dismissed holding off rate hikes on that basis, claiming that “the Fed has a history of overreacting to financial market movements that seem unconnected to economic fundamentals.”
Lacker will be one of 10 voters at the September meeting. While investors previously expected the Fed to take the historic step of raising rates later this month, the recent stock market swings have pushed back expectations for the move to come later in the fall or winter.
Regardless of what happens this month, Yellen and other Fed officials have communicated that when they do raise rates, they will do so only slowly in order to ensure that money remains easy.
Lacker warned Friday that waiting too long for the first hike could make subsequent increases more “dramatic” in order to restrain inflation.
