Jeffrey Lacker is a prolific writer about, and respected critic of, the Federal Reserve, a path that started when he joined the Federal Reserve Bank of Richmond as an economist in 1989 and then went on to become President of the bank from 2004 to 2017. He continues his work at the SOMC, Shadow Open Market Committee, and at the Mercatus Center at George Mason University
Now, as Kevin Warsh takes over as President of the Federal Reserve, and the debate within the Fed intensifies over whether or not it’s time to raise rates to fight inflation, Jeff is arguing for rate hikes starting at the Fed’s July meeting and believes the new Fed chair is the right person to do it.
After two days of Warsh’s testimonies to Congress, Jeff says, ”The big takeway is <that he> is committed to resoring price stability and committed to Fed independence and committed to the Fed staying in its lane.”
Jeff is particularly supportive of Warsh’s prioritization of price stability over the employment mandate aligning with the tradition of two Fed chairs who were tough inflation fighters, Paul Volcker and Alan Greenspan.
“He’s elevated price stability of the two mandates. He…mentions price stability at times without mentioning employment. And I think his formulation goes back to Volcker and Greenspan that, stable, you know, stable prices is, is the best thing that the Fed can do for the employment mandate.”
A creative thinker, as Jeff looks at how Warsh will have to lead the Fed toward the policies needed to bring down inflation, he draws on European parliamentary democracies where many different parties form their coalitions as a way for how Warsh could drive monetary policy now.
”The Fed, you know, from Bernanke onward, has been a center dove coalition … not a center left center dove <coalition>. “ he says. ”And… there were plenty of hawks out there. He could have forged a center hawk coalition and let the doves dissent. But, instead, Bernanke, Yellen and Powell… made it sort of center dove and let the dissents fall on the hawk side pretty much until the last year or two.”
As for what he hopes the Fed will do now, Jeff says the Fed can’t wait to start raising rates. Even though the last CPI report came in on the weaker inflation side, he says the Fed should “take action” and raise its key rate at the July meeting. “I mean it’s getting to the point where it’s just all talk and people are wondering, well, why aren’t you doing something about inflation?”
So dive in and hear why Jeff hearkens to what New York Knicks champion Jalen Brunson said after the NBA finals when asked about the final game of the series, “when you were down 29 points, did you ever get concerned, were ever worried?”
Spoiler alert as Jeff quotes Jalen word for word,
”So he said, you're allowed to think about the worst case scenario, but you got to go out and do something about it. So what I would say to the Fed is you're allowed to say you're committed to price stability, but you got to go out and do something about it, you know? So you got to do something to restore price stability.”
Warsh testimony overview 00:01:25:04
I thought he did a great job. No. You know, flipping through a notebook or anything like that. The big takeaway is committed to restoring price stability and committed to Fed independence and committed to the Fed staying in its lane with, you know, activities limited to its, you know, legislative mandate and legal authority. So I thought those are the big takeaways.
Testimony Demeanor 00:01:54:23
I thought he was very poised. I thought he was adroit at avoiding getting sucked into debates about employment mandate, inflation mandate trade-offs and, you know, tangles about regulation and stuff. I thought he did a really, really good job. I was I was impressed.
Focus on stable prices 00:02:29:18
Oh, well, you know, the commitment to price stability. And he’s elevated price stability of the two mandates. He mentions price stability at times without mentioning employment. And I think his formulation goes back to Volcker and Greenspan that, stable prices is the best thing that the Fed can do for the employment mandate. And so he wasn’t drawn into thinking of that as a trade-off.
The right attitude for the economy today 00:02:58:05
And I think that suits the current macroeconomic situation. You’ve got a labor market that’s strong with a low unemployment rate, good balance between supply and demand. No signs of weakness. People have been sniffing around the idea of downside risk in the employment in the labor market, and it’s just not there. And you’ve got inflation that’s run for five years over… It’s well over its target for much of that. But now in 2024 stalled out at about 3%. And you’ve got to get it down to 2%. He’s got to deliver that. There’s political pressure on that score on both sides of the aisle. And he needs to deliver that. And he knows that that’s the paramount dimension on which Fed policy is missing.
Good rhetoric- but what will the FOMC do? 00:03:46:16
So his elevation of price stability is a welcome break with the way the previous regime talked about inflation and talked about both sides of the mandate and the like. So I think that’s good. So that I think has been really important. What remains is what actions is he going to take or is the FOMC going to take. And we’ll see about that.
Just Do our job 00:04:32:06
He took the same formula. He took the same line. He he took it as nomination hearing, which is that, you know, it’s a free country. People are entitled to their views. I take a wide lens. I listen to all sorts of views all across the spectrum. You know, the White House can say what it wants. Basically, it was this message and I’m we’re just going to keep our heads down and, and do our job.
Open minded/ different people have different opinions 00:04:55:11
And that was exactly Powell’s line. I mean, although he didn’t express tolerance of White House opinion, stating. So Warsh has basically said, you know, people can say what they want. We welcome different views and we’re going to move ahead.
A changed environment 00:05:38:22
I think the fact that the the conversation about Fed rates, policy rates, has changed, the shifted since he was nominated from anticipating like how many cuts, when are they going to come - by the end of the year? That kind of thing to now where it’s clear the direction has to be up because inflation is a problem, it’s not going down on its own.
No more sock puppetry allegations 00:06:00:07
And that, I think is has kind of taken the wind out of the sails of the independent, the sock puppet crew, you know, the people who think he’s going to be a sock puppet and not, you know, independent. So I think that’s taken some of the steam out of that argument. And thankfully, because it sort of moved at this point.
Surprising price weakness; and in nontariff no energy items 00:06:57:16
The growth in the level of prices fluctuates, you know, around its sort of underlying value. You get you get strong months stronger than expected. You get weaker than expected numbers. This was a lot weaker than expected. The striking part of the softness was that the extent to which it showed up in non energy and non-tariff related categories of the core.
Hard to discern the longevity of the good inflation news 00:07:23:19
So energy prices everyone knew that was coming down. Although they’re going to be reversed in June with the, you know energy price spike we have. But the softness in the core and the breadth now there’s a bunch of fluky categories that were kind of responsible. You know, you had you had used cars, you had, you know, car insurance, you had hotel rates and stuff.
The nonoil price temperance may be authentic 00:07:46:01
So you never know. You know, it could be you get a bunch of fluky, you get fluky things every month. But to get a whole bunch of fluky things with the same sign, that’s pretty notable. So it could be coming down. But you know, if if you go into every report with an expectation and then it, you know, the it, it’s on the low side.
Skimpy evidence of a rate peak 00:08:06:24
And that’s your reason for thinking inflation’s peaked. One month’s number is way too skimpy an evidence set to do that. And besides the Fed has a two year history now of expecting inflation to begin declining in the next 6 to 12 months towards 2% and inflation has failed to do so. Now it’s you know, the committee cited some things that have made inflation higher than they otherwise would have been.
Has policy been set in a backwards fashion? 00:08:40:22
But you know, the Fed regulates through interest rates demand. And if demand is growing and some things go up in value, well, you know, if spending doesn’t go down on other things you’re going to have more inflation. So the Fed’s willingness to tolerate these special factors passing through to the overall rate is a problem. I just think policy has been seems to have been set on the basis of what the fed funds rate ought to be.
Inflation forecast mistakes made policy easier than planned 00:09:12:03
When inflation gets to two, under the expectation that within 12 months it will be at two. And that’s a fallacy. I mean, that’s just wrong because if inflation is three now that makes the real interest rate the real federal funds rate one percentage lower than it would be if inflation was two. So they’ve made policy easier, substantially easier. And I think that’s part of the reason we haven’t seen more movement towards 2%.
Fed has been essentially a center-dove coalition 00:10:49:06
He’s he’s got choice. And as he said today, monetary inflation is a choice. So he’s got a choice to put it in terms kind of related to European parliamentary democracies. You know, where you have a lot of different parties in your form coalitions. The Fed, you know, from Bernanke onward, has been a center dove coalition, not center left center dove.
No center-hawk leaning- by choice 00:11:16:08
Right. Okay. And, you know, and there were plenty of hawks out there. He could have forged a center hawk coalition and let the doves dissent. Right. But, instead, Bernanke, Yellen and Powell you know let made it sort of center dove and let the dissents fall on the hawk side pretty much until the last year or two.
Enter the chair of the center-hawks…Warsh 00:11:38:14
So I would expect Warsh to form a center hawk coalition and to build his majority that way, at least on that side of the fence. We’ll see. I mean, it’s this is all a matter of leadership style and proclivities and who he wants to keep on board. But, you know, could he stand Williams dissenting? Would Williams dissent? I don’t know. I don’t think he I don’t think he wouldn’t. But, you know, to let the dissenting points be on the dovish side. So I don’t know if that’s the choice that’s open to them. And we’ll see which way he goes.
So far all talk; Fed can’t drag its feet until after the election 00:12:40:08
No, they can’t wait till after the election. So they got to do something, you know, before the CPI report, I would say go at this meeting, raise rates at this meeting. Take action. I mean it’s it’s getting to the point where it’s just all talk and people are wondering, well, why aren’t you doing something about inflation?
Fed needs to demonstrate action 00:13:01:11
I’m reminded of what a paraphrase of what Jalen Brunson said after the NBA finals. Shaquille O’Neal asked him, when you were down 29 points, did you ever get concerned, were ever worried? So he said, you’re allowed to think about the worst case scenario, but you got to go out and do something about it. So what I would say to the Fed is you’re allowed to say you’re committed to price stability, but you got to go out and do something about it, you know? So you got to do something to restore price stability.
For some, the employment mandate is still the focus 00:13:35:20
We know throughout this congressional - Senate hearing today -where Kevin Warsh was asked and answered many questions, it seems to me that a number of people still said, hey, what about jobs, the dual mandate? What about jobs? And I don’t know if I didn’t even pay attention really, to the party the person was in, but is that something that all that maybe also that Kevin Warsh has to put more clearly on the table.
Several pointed questions on inflation/unemployment tradeoffs -00:14:15:07
Yeah. And so he was asked pointedly a couple of times about like the possibility of a trade off between employment and price stability. And he said, no, I view these two parts of the mandate as I don’t view them as in conflict. And I think that’s right. I mean, it is true that a rate cut, you know, easier policy can, in the short run, like maybe the next few months, make labor markets tighter than they otherwise would have been.
The trade-off notion is a mirage 00:14:46:18
But in the longer run it’ll fuel higher inflation. And that will require tighter policy. So in the longer run, the labor market is not going to be any better off and arguably is going to be worse off. And that’s the reasoning. That’s the economic dynamics behind the position of Volcker and Greenspan, the formulation they adopted, which is that the best contribution monetary policy can make to the employment, to maximum employment is to keep inflation low and stable.
Monetary policy’s impact on the labor market is not so precise 00:15:16:04
So I you know, I don’t think in the broader community of economists and policy analysts and, you know, financial market participants, people reading the employment data, I just think it’s really hard to make a case that there’s a significant gap there between, you know, current conditions and what they could be under a different monetary policy. I just don’t think that’s a credible case people can make now.
Last two or three rate cuts were a mistake 00:16:39:09
I think the momentum is moving in the Hawks direction. People who are dissatisfied with current inflation. I think that the last two, maybe three rate cuts were mistake. I think pretty clearly the last one, Powell had to twist some arms to get that one over the finish line and arguably in November had to twist a little bit too.
Doves are going back down el camino transitory 00:17:00:08
So I think those who resist, who are resisting rate cuts at the end of last year, have been proven correct by the course of inflation this year. The way you know, non housing core has been firming this year. I think that that puts everyone else- all the those on the dovish side - on the defensive I think the dovish side is sort of looking at arguments that this components transitory, that components transitory.
Hawks ascending… 00:17:37:11
The effect is going to fade. That’s going to fade out. So I think they’re look you know they’re they’re pushing all those arguments they can find. And sometimes those are right. And sometimes that’s not a great way to run monetary policy. So I think I see the hawks as in ascendance here. And hopefully our you know, the new chairman will put some hope behind them within the committee.
Some just had a bad read on slower job growth 00:18:18:16
Well, so job growth fell a lot, but the growth in the supply of labor fell a lot. And it looks like demand and supply growth both fell. And they’ve been in line at a lower level since then. And that’s kind of pretty clearly understood because of the swings in immigration net immigration. So I you know, I think that there were some who were willing to read the fall in employment growth as a fall in the growth and the demand for labor.
Predilection’s often pave the way for certain arguments 00:18:55:03
And I you know, I think people come to policy sometimes constitutionally disposed one way or another, and someone with a strong prior that that labor markets could be better than they are now is always going to look for reasons to cut. And I think they seemed to be persuasive with the center of gravity of the committee in 2020, the end of 2024 and the end of last year.
Selective perceptions or a parallax view might explain differences 00:19:22:21
And, you know, I think they talked themselves into evidence that inflation was about to subside from 3 to 2. And I think the evidence was misread in hindsight pretty clearly misread. And plus, their policy cuts provided an impetus to inflation not coming down from 3 to 2. So I think the last couple of years have been a case of monetary policy. Really off course.
Will productivity deliver to ‘goods?’ 00:20:16:01
A lot of people think it’s a boom. And AI is going to continue to to fuel that. But we don’t seem to hear so much from Kevin Warsh about that. Now, do you think that that’s something he stepped away from? Do you think he wants to have that come out in one of his many task forces? Is something that they add, because I don’t want to be overly optimistic, but it kind of feels like, yeah, maybe we are going to have a chance or the Fed’s going to a chance.
Expect some real help from the task forces 00:21:12:15
Well, he’s got a task force for that, as he was saying. And I think that’s a credible group. I mean, Charles Jones, outstanding economist on this topic. I think that, you know, everyone understands that with any technological innovation, it’s implemented widely in the economy. You have you have demand effects. You’ve got to invest. You need real resources to implement the innovations. But at the same time, the innovations are going to be beneficial for supply. You’re going to be able to the real cost of any given unit of output is going to fall, or you’re going to be able to make more stuff that you didn’t used to be able to make. And so productivity will rise on that account. So the question is sort of one of timing and size.
And still all sorts of complications 00:21:56:17
Is the demand effect bigger than the supply effect? Does the demand effect come before the supply effect to the extent that it’s driving demand up? And we have limited resources as we do, you know, trade, trade, employment, trade, labor for example, and skills and stuff and, you know, construction capacity, equipment and the like. The extent that you have capacity bottlenecks, you have to persuade somebody to postpone spending in order to make room for the stuff you want to invest in. And the way to get people to postpone spending is to raise real interest rates. On the other side, you know, an increase in in productivity has, you know, has this one time effect of making prices lower for any given wages than they otherwise would, would be. And so but that’s like a one time thing. So it’s a it’s a delicate comparison.
Task forces can help but will not be a panacea 00:22:57:04
You need a good framework and model to sort that out. And I’m, I’m taking this task force, as you know, I think they’re charge is to figure that out, you know, and but, you know, they’re not going to be able to say now, you know, they’re going to be able to lay out some good data, lay out some evidence, and suggest where the probabilities lie of various different scenarios. I think that’s what they’re going to be about.
What households think matters 00:24:16:10
So in the 70s we learned a couple of things. One is that. Business and household expectations about future monetary policy were really important. And I think in that spirit, you know, all over the world in the 80s and 90s, central banks tried to communicate what they wanted inflation to be, that they wanted price stability, that that meant to inflation. And I think that was very beneficial then in the 2020 tens.
In the past- Expectations management by the Fed 00:24:49:22
I think that conveying a sense of the course of monetary policy actions over the next couple of years was found to be important in the after the great financial crisis, the center Dove coalition I referred to earlier, the Fed was avidly interested in convincing markets that the future level of the federal funds rate, the path of the federal funds rate, was going to be lower than people thought that they were trying to push down the yield curve and obtain stimulus that way So they were basically saying, your forecast of our future should be that we’re going to make interest rates lower. The now, the unfortunate byproduct of that, both those ways of looking at things, is that you’re focused on the mean of what policy is going to be in the future, but policy is going to depend on future data.
Policy need consistency and longevity 00:25:48:17
And what the other thing we learned in the 70s is that you shouldn’t think of policy as a sequence of one off actions. You should think of policy as a systematic pattern of responding to incoming data. And that part of it is very important to, I mean, the sense that that people had in 2022 that, oh, inflation is rising, but the Fed’s going to get it back down to 2%.
Not a dot lover…not enough certainty to them 00:26:17:08
And we’re not sure what that means for the funds rate now. But we’re pretty sure that in ten years inflation will be around 2%. And that’s what financial markets did with 2000. But that depended on them understanding how the Fed would respond to a range of scenarios. And I think that backing away from point forecasts of the funds rate is probably a good idea, because those dots distracted attention from the uncertainty around future policy and the extent to which future policy was going to depend on future incoming data and scenarios.
Fed hit a credibility air pocket 00:27:24:07
Yeah. So yes the fed suffered a significant blow to its credibility in 2021, 2022, and 23. And since then it hasn’t brought inflation back down to 2%. I think that the steps Chairman Warsh would need to take would include strong articulation of the focus and the urgency of getting restoring price stability, restoring inflation 2%. However, actions speak louder than words.
Actions matter the outcome you produce matters 00:27:55:22
And I go back to Jalen Brunson. You know you got to go out and do something about it. And you know it’s his credibility is going to erode. If he doesn’t take action and doesn’t you know in a year or to deliver significantly lower inflation okay.
To get tis credibility the Fed HAS TO raise rates 00:28:44:12
So yeah it has to raise rates. Maybe even throw in a 50. And you know get rates noticeably higher at the end of the year. Now for what it would take as it comes about. I think it would be I’d love to see them raise rates at the next meeting. Now, the the CPI report makes it really awkward. So the Fed doesn’t make policy based on just one data point, one month’s data.
Despite CPI there is a case to raise rates 00:29:17:08
And that’s going to apply here. But having said that, if you look through, you know, you look through the trend of like several months data. Yeah, inflation’s been firming. So even with this report inflation is still higher than you want it to be. And there’s still a case to raise rates. But the Fed often - the FOMC often - doesn’t want to do something that doesn’t jibe with the most recent data point.
Hard to again the grain even a single grain 00:29:44:06
You know like the the most recent data point needs to be in line with the general trend of the story that, you know, the narrative that you’re you’re working on. And so I think that makes it awkward for them to raise given the fall in the CPI. But so I’m guessing they won’t. But if they did, it would be I think it would be warranted. Number one, I think the case is strong and I think it would be a great substantive signal on his part about forward guidance. Okay.
Jeff sees more than one hike potentially…two or three 00:31:05:01
You know, I’m in the spirit of, of avoiding the dangers of forward guidance. You know, suggests you do it. You do a hike, you know, maybe they’re not willing to do it here because of the CPI number. So you do a hike in September and, you know, you leave the door open to whatever at the next month, and then you do another one the next month. So I think 2 or 3 by the end of the year is not at all inappropriate. Would not at all being appropriate, given where inflation seems to be and is likely to go in the next few months.
Rate hikes to get back to the 2% target sooner 00:31:43:20
I think so, yeah. And then by the end of the year you’ll have some more data and you’ll see.
Jeffrey Lacker
I am currently a Senior Affiliated Scholar at the Mercatus Center at George Mason University, a member of the Shadow Open Market Committee, and a Fellow of the Global Interdependence Center College of Central Bankers. I worked at the Federal Reserve Bank of Richmond from 1989 to 2017, where I was President from 2004 to 2017. From 2018 to 2022 I was Distinguished Professor in the Department of Economics at the Virginia Commonwealth University School of Business in Richmond, VA. From 1984 to 1989 I taught at the Krannert School of Management at Purdue University. Early in my career I worked at Wharton Econometric Forecasting Associates.
You can find my academic and Federal Reserve publications from before 2017 at this Richmond Fed web page. Speeches and testimony from that time on central bank policy issues (as opposed to the economic outlook) can be found here under the “At the Fed” tab. Post-2017 work can be found at the tabs for “Recent Appearances” and “Recent Writings”.
All the speeches I gave as Richmond Fed President are listed at this Richmond Fed web page. This IDEAS/RePEc page lists all my publications.
My curriculum vitae is at the “CV” tab.My biography on the Federal Reserve History web site is here, and the Wikipedia page about me is here. A bio is here.
I am currently associated with the following organizations:
Shadow Open Market Committee, Member
Mercatus Center at George Mason University, Senior Affiliated Scholar
Global Interdependence Center College of Central Bankers, Fellow
Virginia Commonwealth University Investment Management Company, Board of Directors
Council for Economic Education, Board of Directors
Virginia Council on Economic Education, Board of Directors
World Affairs Council of Greater Richmond, Board of Directors
University of Richmond, Trustee Emeritus
