The Fed's odd man out

Lacker was lone FOMC official voting for higher rates

October 31, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

While he may not win friends among consumers with mortgages and credit cards by advocating higher interest rates as the lone wolf at the Federal Reserve, Jeffrey M. Lacker is actually a booster for the economy.

Lacker, who is building a national reputation as the only rate-setting Fed official to break publicly with Chairman Ben S. Bernanke, said yesterday that he continues to believe the economy is "resilient enough" to withstand further tightening.

Bernanke, who took over as Fed chairman in February, has been in favor of leaving interest rates unchanged.

Lacker expressed his hawkish view on inflation in a breakfast speech to about 300 people at the Baltimore Convention Center. The affair was sponsored by the Greater Baltimore Committee, a business and civic leadership group.

The economy - apart from the housing market - is in "reasonably good shape," Lacker said, with consumers still spending and jobs being added at a rate commensurate with population growth.

Businesses were investing and improving profitability, and the housing market appears to be near the bottom of a decline and will certainly avoid a catastrophic collapse, he said.

On the other hand, Lacker said, the outlook for inflation is "discomforting."

Until this summer when signs of a slowing economy eased fears of higher prices, the Federal Reserve under Bernanke continued a rate-raising campaign begun by his predecessor, Alan Greenspan, to dampen inflation.

But the Bernanke epoch is shaping up to be more openly contentious than the Fed under Greenspan, which was known for its unanimity.

Lacker has voted in three consecutive meetings to raise rates while Bernanke and his colleagues have voted to maintain them. By comparison, only five dissenting votes were cast in nearly 50 meetings under Greenspan's chairmanship dating from 2000.

"It's kind of a rarity to have dissent," said Toby M. Thompson, a fixed-income analyst at Brown Advisory in Baltimore. "With Greenspan, everyone just fell behind in a row like ducks; maybe it's good to have dissent."

Lacker serves as president of the Federal Reserve Bank of Richmond, whose district includes Maryland. This year he's a voting member of the Federal Open Market Committee, which controls short-term interest rates.

After his speech, Lacker said he doesn't think dissent undermines the Fed's credibility but rather strengthens the perception of vigorous debate at the institution.

According to his spokeswoman, Lacker's office has received more requests for interviews from the media since his contrary voting streak began.

"I think the public expects each of us to express our opinions," he said. "This will result in stronger monetary policy over time."

The Commerce Department reported yesterday that a measure of inflation closely monitored by Fed officials decelerated. September's core price index for personal consumption expenditures, excluding food and energy prices, grew at 2.4 percent rate, slightly below the 2.5 percent registered in August.

That's still above the 2 percent level that many Fed officials, including Lacker, have said is the top end of the desirable range.

Lacker has said that he would like to see inflation average 1.5 percent over time. He said yesterday that the Fed is considering a policy of inflation targeting in which the central bank would aim for an explicit rate of price increases.

Lacker, who favors targeting, said the Fed's job is as much about setting short-term rates as it is about managing inflation expectations. He pointed to the 1970s as a time of disastrous monetary policy when the Fed allowed inflation to rise.

"The longer inflation remains elevated, the more difficult it will be to bring it back down," Lacker warned.

The Federal Open Market Commitee meets again in December but no rate changes are expected until next year.

Lacker said the Fed's future communications might focus more on its strategy and objectives to diminish the "microscopic attention" given to dissecting the technical language in the central bank's statements.

As for his own words, Lacker seemed keenly aware that the public is paying attention when he gave the standard disclaimer before his speech: "The views discussed here are my own and do not necessarily coincide with any other Fed member."

That may have been apparent already, he joked, considering his recent voting record.

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