Richmond Fed chief is hawk on inflation


There is nothing on Jeffrey M. Lacker's resume suggesting that he would be the Federal Reserve's next inflation scold, a central banker who suspects other central bankers of lacking backbone.

But that's what he seems to have become.

All year the president of the Federal Reserve Bank of Richmond, whose district includes Maryland, has warned of potential rising prices in tones slightly more strident than those of his Fed colleagues. He has appeared less willing to concede that steadily higher interest rates are no longer needed to slow the economy and fight inflation.

On Tuesday he dropped the thunderbolt. Just seven months after joining the Fed's powerful rate-setting committee, under a new Fed chairman still feeling his way, Lacker voted for even higher rates as all of his colleagues agreed to hold steady.

It was the first dissent on Ben S. Bernanke's Fed. Some money managers view Bernanke, who succeeded Alan Greenspan as chairman in February, as a potential inflation appeaser. Lacker may now be their champion.

"He's been much more outspoken in public" against inflation than his colleagues, says Ethan Harris, the chief U.S. economist for Lehman Brothers in New York, who also believes inflation is nowhere near beaten.

"We thought there was about a 30 percent chance he would dissent" at the meeting. "He was the only one we thought [who] was a strong chance to dissent," Harris said.

Early this year, when Bernanke was praising "the relatively benign performance of core inflation despite the steep increases in energy prices," Lacker, speaking at Towson University, emphasized that "monetary policy should respond to energy shocks by remaining focused on price stability." (Price stability is Fed-speak for tame inflation.)

While Bernanke worried that soaring energy prices "might ... hurt consumer confidence and thereby reduce spending on non-energy goods and services," Lacker saw growth and inflation pressure, saying that consumers often continue shopping amid "general economic nervousness, despite how they respond to telephone pollsters."

In April, as Bernanke warned that "significant uncertainty attends the outlook for housing" and therefore the health of the economy, Lacker said he believed that "plausible rates of moderation in housing activity will not pose a problem for overall activity this year or next."

Mark Vitner, a senior economist at Wachovia Corp., downplayed the split, saying that Richmond Fed presidents have traditionally been hawkish and that perhaps Lacker's vote was intended to reassure Wall Street that the Fed hasn't gone totally soft.

"Somebody had to do it, and he was the most likely one to step up in dissent," Vitner said. "The reason somebody had to do it is the Fed is really taking themselves way out on a limb here in the hope that inflation is going to moderate in the second half of the year. And so far we've seen nothing in the inflation data that would indicate that would happen."

True enough.

In June the Labor Department's Consumer Price Index was 4.3 percent above its level a year earlier. That was the second-biggest increase since 1991.

The Fed's preferred inflation gauge, the Commerce Department's "core" personal consumption index, strips out volatile food and energy prices. But even that showed a year-over-year gain of 2.4 percent in June - the second-highest reading since 1994.

Before assuming the Richmond Fed presidency two years ago, Lacker, 50, had not presented himself as a big inflation hawk. He had been at the Richmond Fed since 1989. He agrees with Bernanke that the Fed should ideally pursue an "inflation targeting" policy, in which the central bank would aim for an explicit rate of price increases. But most of his studies have had to do with capital formation and the Fed's less glamorous but crucial business of supervising and interacting with private banks.

With his ascension to the Federal Open Market Committee, which controls short-term rates, and his vote last week, Lacker gains a much higher profile.

"We've been getting various sorts of inquiries about Jeff the last couple days," John Weinberg, the Richmond Fed's director of research, said Thursday. A spokeswoman declined an interview on Lacker's behalf, saying FOMC members agree to a speech and interview blackout immediately before and after rate-setting meetings.

Some of the Fed's toughest inflation foes have been monetarists in the tradition of Milton Friedman. They believe that inflation is always a function of money supply and are extra wary of promiscuous monetary expansion and low rates. Lacker, however, seems to get his vigilance more from "the central-bank tradition" that inflation is always hiding around the corner, plotting a comeback, says Harris, the Lehman Brothers economist who once worked at the New York Fed.

"You get kind of brainwashed into the Fed thinking, which is the idea that the Fed is the guardian against inflation, and there's no other institution that's going to protect the economy," Harris said.

If higher inflation refuses to fade away, one guy will be able to say, "Told you so."

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