Lacker, the Blind hawk

According to him:

Inflation is likely to move back to the U.S. central bank’s 2% annual target in the “near-term,” said Richmond Fed President Jeffrey Lacker, on Thursday. “After the price of oil bottoms out, I would expect to see headline inflation move significantly higher,” Lacker said in a speech to the Chamber of Commerce in Raleigh, N.C.

Lacker is a hawk on the Fed’s interest rate committee, having dissented at the Fed’s September and October meetings in favor of an increase in interest rates. He is not a voting member of the Fed policy committee this year.

His visual capacity is nil! What would he think after looking at a chart like this?

Blind Hawk

Between 2001 and 2008, oil prices went up by a factor of 6. Headline inflation went up but core inflation was very well behaved, staying close to “target”.

Between December 2008 and January 2011, oil went up by a factor of 4, and remained at that high level for the next 37 months. Headline inflation quickly moved below target before tanking with the drop in oil after early 2014. Meanwhile, core inflation was significantly below target for most of the last seven years.

He thinks oil price is the driver of inflation, when it only determines the swings in headline inflation. That misguided thinking has already brought much grief!

Think instead that monetary policy determines trend inflation, and look at core inflation as “trend inflation”. In that case, if you are “hawked” on headline inflation you will be “busy”, but will also do a lot of harm!

By osmosis, inflation will converge on 2%!

John Williams is the “on one hand on the other hand” kind of guy:

I’ll start with the arguments for continued patience in removing monetary accommodation. First, we are constrained by the zero lower bound in monetary policy and this creates an asymmetry in our ability to respond to changing circumstances. That is, we can’t move rates much below zero if the economy slows or inflation declines even further. By contrast, if we delay, and growth or inflation pick up quickly, we can easily raise rates in response.

This concern is exemplified by downside risks from abroad. One such risk is the financial turmoil and economic slowdown in China, which I’ll get to shortly. More generally, economic conditions and policy overseas, from China to Europe to Brazil, have contributed to a substantial increase in the dollar’s value, which has held back U.S. growth and inflation over the past year. Further bad news from abroad could add to these effects.

That brings me to inflation, which has been under our target for over three years. This is not unique to the United States—inflation is very low in most of the world. Although we can ultimately control our own inflation rate, there’s no question that globally low inflation, and the policy responses this has provoked, have contributed to put downward pressure on inflation in the U.S. Although my forecast is that inflation will bounce back, this is only a forecast and there remains the danger that it could take longer than I expect.

Those are arguments on the side of the ledger arguing for more patience. On the other side is the insight of Milton Friedman, who famously taught us that monetary policy has long and variable lags. I use a car analogy to illustrate it. If you’re headed towards a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection.

Luckily Bullard doesn´t vote, otherwise there would have been two dissents:

“The case for policy normalization is quite strong, since Committee objectives have essentially been met,” he said during his presentation titled, “A Long, Long Way to Go.”

However, he noted, “Even during normalization, the Fed’s highly accommodative policy will be putting upward pressure on inflation, encouraging continued improvement in labor markets, and providing the best contribution to global growth that we can provide.”

Bullard noted that the FOMC wants unemployment at its long-run level and inflation at the target rate of 2 percent. “The Committee is about as close to meeting these objectives as it has ever been in the past 50 years,” he said.

In justification of his dissent, Lacker wrote:

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook.

“Inflation has run somewhat below the Committee’s 2 percent objectivein recent years and was held down late last year by declining oil prices and appreciation of the dollar. Since January, however, inflation has been very close to 2 percent. Movements in oil prices and the value of the dollar in recent weeks have renewed downward pressure on inflation. As with last year’s episode, this disinflationary impulse is likely to be transitory. So I remain confident that inflation will move back to the FOMC’s 2 percent objective over the medium term.

They can go on “wishin´and hopin´”, but it just won´t happen, at least not while NGDP growth is so low and constrained!


Drinking buddies: One wants to slow down the refills, the other wants the punchbowl taken away


“The projected combination of a gradual rise in the nominal federal funds rate coupled with further progress on both legs of the dual mandate is consistent with an implicit assessment by the Committee that the equilibrium real federal funds rate–one measure of the economy’s underlying strength–is rising only slowly over time.”


“In current circumstances, raising the funds rate target a notch or two is less like taking away the punch bowl and more like just slowing down the refills,” he said. “We will still be spiking the punch–just not quite as rapidly as we have been.”

Outside the “bar”, Kevin pickets:

“Now, I would say the markets are exhausted. They’re exhausted that the Fed has decided there’s a new set of benchmarks,” . “Before it was forward guidance. Now it’s, ‘Just kidding about forward guidance. Citing the sliding unemployment threshold for considering an interest rate hike, he said it’s now 5.5 percent or even 5 percent, down from 6.5 percent not too long ago.

Lacker´s “homily”

Given the performance of the economy and very robust improvements in the job market, “June has to be on the table,” Mr. Lacker told a SiriusXM satellite radio program. He explained that as long as the economy meets his expectations, “June would strike me as the leading candidate for liftoff” in moving short-term interest rates off their current near-zero levels.

Mr. Lacker was upbeat about what he saw in the jobs report, which showed that the economy added 295,000 jobs during a drop in the unemployment rate to 5.5%.

“It was a very good report, very strong and consistent with last month, and consistent with the picture we’ve been getting over the last year of the significant improvement in labor market conditions,” Mr. Lacker said. Broadly speaking, the data shows “the willingness of people to say, ‘Take this job and shove it,’ and move on to take a chance on a new position” in pursuit of higher wages, with the confidence that if it doesn’t work out, a better job can be found, he said.

You could say the report was“good” regarding the drop in the unemployment rate. But “strong”? If people are leaving the labor force the unemployment rate will come down. How “strong”, then, were the reports when unemployment was falling but the labor force participation rate was on the rise? Then, people were much more likely to do the “shove it” routine!

Lackers Homily

And Lacker´s “funny” aside:

The official also indicated that he favors moving away from the Fed’s current pledge to be “patient” with rate rises, saying he’d like the wording to be struck from the FOMC statement in order to give officials more flexibility to respond to economic data.

Translation: “Let´s increase rates now so that we will regain the option of being able to reduce them later”!