Fed’s Lacker Sees Strong June Rate-Hike Case as Risks Fadeby and
Market overestimated FOMC intention to continue pausing
Warns of higher inflation, though some overshoot acceptable
Federal Reserve Bank of Richmond President Jeffrey Lacker said a June interest-rate increase by the U.S. central bank is in order with global risks having “entirely dissipated.”
“I certainly supported a rate increase at the April meeting,” Lacker said Thursday in an interview on Bloomberg Radio. “I think the case would be very strong for raising rates in June.”
The policy-making Federal Open Market Committee will next meet June 14-15 in Washington. Minutes of their April session released Wednesday showed most of the committee favored a June increase if the economy continues to improve.
Lacker said the risks to growth in China “look less, certainly than a few months ago” and he didn’t expect the dollar to strengthen enough to damage the U.S. economy.
“I see risks from global and financial developments having virtually entirely dissipated,” he said.
Lacker, who doesn’t vote this year on FOMC decisions, said investors misread the committee’s intentions after it held rates steady at its most recent two meetings.
“Markets took the wrong signal from us pausing in March and April," he said. “They overestimated how likely we were to pause for the rest of the year.”
Odds of a Fed rate hike in June, based on prices in federal funds futures contracts, were as low as 4 percent earlier this week. Following the FOMC minutes release they bounced back to more than 30 percent.
The Fed raised the target range of its benchmark lending rate for the first time in nearly a decade in December, setting it at 0.25 percent to 0.5 percent. Lacker estimated the appropriate level now was somewhere between 1.5 percent and 3 percent.
Lacker, 60, a Lexington, Kentucky, native, is the longest serving regional Fed president having held the post since 2004.
In a separate interview following his radio appearance, he said continuing to hold down short-term rates was getting more perilous as wage pressures became more apparent.
“The risk seems to be growing to me that we overshoot on the high side and find ourselves forced to raise rates abruptly,” he said.
He added that inflation above the Fed’s 2 percent target was not necessarily unwelcome.
“One shouldn’t get hysterical about half a point above or below,” he said.
Core inflation, as measured by the Fed’s preferred gauge, has been below 2 percent for almost four years.
Lacker also weighed in on presumptive Republican presidential nominee Donald Trump’s comments that if he wins the White House in November he would probably replace Fed Chair Janet Yellen. “I think it would be problematic for a presidential candidate to dismiss a Fed chair on the basis solely of the perceived party affiliation," he said.