Federal Reserve Bank of Richmond President Jeffrey Lacker expressed confidence that inflation will return to the central bank’s target after oil prices and the U.S. dollar stabilize and called for a continued tightening in monetary policy.
“While there is uncertainty about the pace at which monetary policy rates will rise, the case for an upward adjustment in rates should be clear,” Lacker said in the text of a speech Thursday in Raleigh, North Carolina.
The Fed’s expectation that rate increases will be gradual suggests a 1 percentage point increase a year in rates, though the actual path will depend on how economic data come in, Lacker said. He was a voting member last year of the policy-setting Federal Open Market Committee, which decided Dec. 16 to raise the nation’s benchmark lending rate target to a range of 0.25 percent to 0.5 percent, from near zero.
Some Fed officials saw the move to tighten as a close call, and there was increased concern about the downside risks to the central bank’s 2 percent target, according to minutes of the meeting released Wednesday.
Lacker, by contrast, said he remained confident, “barring subsequent shocks,” that inflation will move back to 2 percent ”over the near term.”
“In short, inflation has been held down by two factors, the falling price of oil and the rising value of the dollar,” he said. “But neither factor is likely to depress inflation indefinitely. After the price of oil bottoms out, I would expect to see headline inflation move significantly higher. And after the value of the dollar ultimately tops out, core inflation should move back toward 2 percent.”
If oil prices and the dollar stabilize, but inflation doesn’t quickly respond, “a shallower path for interest rates would make sense,” Lacker said. “If inflation moves rapidly back toward 2 percent, however, a more aggressive path would be in order.”
Lacker supported the FOMC statement last month announcing the first rate increase since 2006 and a future gradual pace of tightening. He dissented in September and October against the FOMC’s decision to delay liftoff from near-zero rates, and has voted against the majority in favor of tighter monetary policy frequently in the past.
In his remarks, Lacker said he expects growth this year of about 2.2 percent, in line with the pace since 2009, as stronger consumer spending and increased government outlays are offset in part by weakness in exports. That would be enough to generate further job growth and a decline in unemployment, he said.
Lacker has led the Richmond Fed since 2004 and previously served as its research director. The Richmond Fed district includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia.