Richmond Federal Reserve Bank President Jeffrey Lacker said a Fed policy devoted primarily to reducing unemployment risks damaging the central bank’s credibility in containing inflation.
“With inflation reasonably close to any plausible definition of price stability, and all expectations measures pointing in the right direction, making unemployment a policy imperative poses clear risks to the credibility of our long run inflation goals,” Lacker said yesterday in a speech in Chapel Hill, North Carolina.
The Fed is considering the purchase of more Treasury securities and efforts to boost inflation expectations to stimulate the economy and reduce unemployment persisting near 10 percent, according to minutes of the Sept. 21 meeting of policy makers released this week. The central bank was prepared to ease monetary policy “before long,” the minutes said.
“Inflation is now on target, as far as I’m concerned,” Lacker told business leaders in the region. “I do not see a material risk of deflation -- that is, an outright decline in the price level.”
Lacker’s view contrasts with the central bank’s statement after its Sept. 21 meeting that inflation is “somewhat below” levels consistent with its congressional mandate for stable prices. The Fed said it was “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
In response to audience questions, Lacker said he hadn’t made up his mind on whether to support more asset purchases.
The Fed is in “unchartered waters” in gauging the effectiveness of more easing, Lacker said. “While I’m very confident quantitative easing can have a strong and powerful effect on inflation and the price level, it’s less clear that monetary policy can ameliorate the problems and impediments that are leading to the sluggish growth rate we’re having now.”
Recent U.S. economic data hasn’t gotten worse, Lacker said to reporters after his speech. He said he considers declining economic conditions a prerequisite for more easing.
“I thought if the economic growth and inflation numbers came in the way I was expecting them to I’d probably not support more easing,” he said. “I think the numbers have come in about as I’ve expected over the last couple of weeks.”
New York Fed President William Dudley and Chicago Fed President Charles Evans have voiced support for renewing asset purchases, while Charles Plosser of Philadelphia and Richard Fisher of Dallas have said such actions may not work.
Below Fed’s Goal
Inflation, measured by the personal consumption expenditures price index, minus food and energy, has been below the Fed’s goal for five consecutive months. The price measure rose 1.4 percent for the 12 months ending August. Prices excluding food and energy have gained at a 1 percent annual pace in the three months through August.
Lacker said over short periods, inflation can be volatile and he prefers to look at annual rates. “I am not yet convinced that inflation is likely to remain undesirably low,” he said.
“Personally I think inflation expectations are in a reasonably good place,” Lacker told reporters. “They seem consistent with the price stability we’ve had in recent years.”
The Richmond Fed chief said while the recovery has been “disappointing,” he agrees with private forecasts calling for an acceleration in growth next year.
“The consensus among professional forecasters is that growth will be about 2 percent at an annual rate over the second half of this year, and will slowly gain enough speed thereafter that unemployment begins to decline next year,” Lacker said. “If forced to choose right now, my forecast would lie quite close to that path.”
Lacker cited various explanations for why economic growth has been slow, including a mismatch of jobs with the skills of out-of-work people, and an uncertainty about government policies that prompts businesses to delay expansions.
“It could be the pace at which skills have become obsolete has picked up,” Lacker said in response to an audience question.
The worst U.S. recession since the Great Depression ended in June 2009, the National Bureau of Economic Research said last month.
Still, a slowdown raises the possibility of another downturn. Economic growth decelerated to an annual 1.7 percent rate in the second quarter from 3.7 percent in the first quarter and 5 percent in the last three months of 2009, according to the Commerce Department.
Payrolls fell by 95,000 workers last month after a revised 57,000 decrease in August, the Labor Department said Oct. 8 in Washington. Companies added 64,000 jobs, less than forecast, while the unemployment rate held at 9.6 percent.
The Fed’s policy-setting Open Market Committee meets on Nov. 2-3, giving members time to digest reports on September employment, retail sales and inflation.
The Fed’s goal has been to keep inflation rising annually at around 1.7 percent to 2 percent.