What Do You Think the Chances Are that Jeffrey M. Lacker Is Right in 2015?
Jeffrey M. Lacker , sole dissenter from the Federal Reserve's decision last week to keep the interest rates it controls unchanged:
I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Household spending, which has grown steadily since the recession, has accelerated in the last couple of years. Labor market conditions have steadily improved as well and have tightened considerably this year. With the federal funds rate near zero and inflation running between 1 and 2 percent, real (inflation-adjusted) short-term interest rates are below negative 1 percent. Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets...
This is remarkable. This is remarkable, of course, because I cannot think of a single case since he became Richmond Regional Federal Reserve Bank President in 2004 in which any of Lacker's dissents from the Federal Reserve have shown positive insight into the actual state of the economy.
Can anybody?
There is something very wrong with looking back, nothing that your views of the economy have been inferior to those of his colleagues ever single year since 2004--we are now talking twelve years running--and yet continuing to stubbornly think as you thought back then and dissent in the same way you would have dissented back then on the grounds that you know better.
Without ever giving any signs that twelve years of being wrong has induced any humility.
Or any attempts to mark your beliefs to market.
Or any rethinking of intellectual positions and ideological commitments at all...
Jeffrey M. Lacker: wrong in 2006: "Lacker's vote was the solitary dissent in the August, September, October, and December 2006 Federal Open Market Committee (FOMC) meetings..."
Jeffrey M. Lacker: wrong in 2007:
Jeffrey M. Lacker(2007): The Economic Outlook : "As recently as its Aug. 7 meeting...
...the FOMC identified its 'predominant policy risk' as 'the risk that inflation will fail to moderate as expected.' I believe that this risk remains relevant.... Central banks should be careful to conduct policy during periods of financial market distress in ways that are consistent with their long-run goals, both for price stability and economic growth.... Federal funds rate adjustments in response to changes in the outlook for inflation and growth should continue to endeavor to stabilize inflation expectations...
Jeffrey M. Lacker: wrong in 2008:
Jeffrey M. Lacker(July 2008): The Economic Outlook : "Inflation is unacceptably high...
...Of course, price increases have been concentrated in the food and energy categories.... The risk is that elevated rates of increase in overall prices become embedded in expectations.... The apparent stability of inflation expectations does not justify complacency, however. Those expectations depend critically on confidence.... Maintaining credibility depends on continuing to conduct policy in a way that is consistent with the stability of inflation expectations, and acting forcefully should those expectations erode....
Just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well.... We need to be attuned to the risk that we emerge from the slowdown with inflation following a higher trend than when we went in. This danger associated with the persistence of elevated inflation warrants an additional measure of vigilance...
Jeffrey M. Lacker: wrong in 2009: "[He] dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs..."
Jeffrey M. Lacker: wrong in 2012: "[He] does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014..."
Jeffrey M. Lacker: wrong again in 2012: "I don't think there's much that monetary policy's capable of doing.... The real economy is beyond our ability to influence in large measure..."
---------------------------------
What Do You Think the Chances Are that Jeffrey M. Lacker Is Right in 2015?
by Brad DeLong
Tags
Who is online
141 visitors
When the Fed voted "nearly unanimously" the other day to maintain its rates at 0 - 0.25 %, I wondered who the lone "nay" vote might be. I did a bit of research to find and then read up on Jeffrey M Lacker.
His voting record is remarkable. Never -- not one single time, regardless of circumstances -- has he voted for lower rates!
So I figured that somebody in the econoblogosphere would ... more or less politely ... spotlight the man.
That didn't take long...
If you like this stuff, the best starting point is Mark Thoma's daily links list .
Volcker gives take on rates
Saturday, April 11, 2015, 9:00p.m.
Former Chairman Paul Volcker thinks the Federal Reserve Board should normalize interest rates soon.
Regarded as the foremost central banker of modern times, Volcker broadly defended the Fed's economic stimulus and zero interest-rate policy. In an interview with this columnist last month in New York, he answered questions on a number of topical issues but emphasized it was time for the normalization of interest rates.
A key question confronting investors and the public is when the Fed will allow interest rates to adjust to levels that reflect an aggregate balance between borrowers and savers in a free market. Last week, Mohamed El-Erian, former CEO at PIMCO, urged the Fed to recognize that zero interest rates were causing mounting imbalances that could magnify future instability.
Volcker, Fed chairman under Presidents Carter and Reagan, was appointed by President Obama to chair the Economic Recovery Advisory Board in developing the Volcker Rule. (I think he only worked for him for a month or two starting his first term.)
Volcker's most widely acclaimed achievement was the conquest of stagflation, which is economic stagnation combined with financial inflation. He raised the federal funds rate to 20 percent in June 1981.
I asked Volcker whether he could have achieved this historic victory without the support of Reagan. He replied: Despite the pressure from the White House and the Treasury saying this dumb guy at the Federal Reserve,' never did he (Reagan) say anything bad personally or in public.
Questioned whether America can afford the normalization of interest rates, Volcker replied, I sure hope so. The quicker we get there, the better, as far as I am concerned. It's a difficult process. It will take some time. It's an unprecedented period.
Citing the sensitivity of the market to every tiny little wiggle, Volcker said the Fed will have to move carefully to manage some tightening without the market overreacting. At the moment, only baby steps are possible.
Most central bankers see gold as an embarrassing measure of currency debasement and wish to demonetize it.
President Nixon broke the dollar's last link to gold in August 1971. Asked whether he supported that move, Volcker said, I was the principal instigator. I think there was no alternative. ... We needed change in exchange rates. We needed to get off gold. It was an untenable situation.
Asked whether the euro will survive, he said, I hope so. What is surprising is how strong the (European) central bank is (acting) to maintain the euro. They see this as very important to the political and economic stability, and I think they are essentially right.
However, he added, If you are going to have a common currency, you have to have a central bank and a central government mechanism, (and) you've got to have some discipline.
Volcker was an international champion at invoking strong, painful monetary controls, even accepting recession. Now that recession threatens economies and the Fed appears paralyzed over raising interest rates, Volcker remains a highly respected voice.
Effective Federal Funds Rate
I'm no economist, but somehow it doesn't seem like the economy is so great if you can't raise the Federal Funds Rate above .14%. It also seems the value of many stock prices have doubled in the last 5 years and some have gone up much more than that. I'm not including those before the last 5 years that fell out of the sky and are still only 1/20th the value they were in 2007 and 2008.
Also, there are many more people on the wrong side of the food chain these days.
It seems the only people making money are making it down on Wall Street.
It seems the market has been very fragile lately and we don't have any room left to support it with quantitative easing with a Debt to GDP ratio of over 100%, up 30% in the last 7 years.
The reaction of the Feds leads me to believe they don't have much confidence in the economy in spite of what anyone says about the economy getting better.
Better is when a retired person can earn more that 1% on their savings or retirement plan.
We already have inflation. Go to the grocery store and look at the prices. Some items are keeping their same prices, but they are putting them in smaller cans and packages so you're paying the same but getting less.
Like I said I'm no economist, but all these things are contrary to a good economy to me.
Very interesting post.
I'm a Volcker groupie... but at the same time, I think that many lessons have been learned since his tenure.
I don't care for Mr Browne's way of gliding around among three different domains: facts, Mr Volcker's thinking, and his own thinking... often without labeling which is which. For example;
This is "key" for whom? Who are "investors and the public"?
What does "allow" mean in this sentence? The Fed doesn't "allow"; it "sets" rates according to inflation and employment data. I know of no measure of " aggregate balance between borrowers and savers in a free market". What "free market" is Mr Browne talking about? The money market is anything but "free".
What is the following sentence doing in the middle of a kinda sorta Volcker interview:
Mr Browne gives the impression that this sentiment is Mr Vocker's... but I very, very much doubt that Mr Volcker has any goldbug tendencies.
Very true!
The problem for the Fed is that there is no significant imperative to raise rates. (Wall Street bankers want such a raise because being so close to zero crimps their profits, but for once the Fed is ignoring the Golden Boys.)
OTOH, there are some pretty good reasons for not raising rates. Employee income is flat despite a goodunemploymentnumber. China looks flaky. The eurozone is still a basket case.
IMNAAHHO, one of our biggest problems with economics is that we treat the subject as a morality play. "Debt" is not (or rather "should not be") a question of morality. Debt is a component of the economic scene. Like most components, its significance varies, depending on all the other components.
Right now, US Treasuries, including 25-year, are yielding about 2%. Inflation is between 1 and 2%. Basically, the government can borrow -- long term -- for free . The only reasonable reason for not borrowing heavily to finance all the infrastructure work the nation needs would be a heavy debt servicing load. (Just like families should not allow loan repayment to take up more than, say, 25% of their budget. Right now, debt servicing is a little under 11% of the Federal budget -- certainly not a problem.
So... we should be borrowing massively -- hey! FREE money!! -- for projects that would create more jobs, and put some tension into the jobs market. We would see employee income rise, as companies begin to have to pay more to get good people. Then a Fed rate rise would be possible, and your retirees would get more than 1%.
But no.
Politically, it is impossible to borrow, because that would be more debt and that is politically unacceptable in the morality play that is economic policy.
It's pretty depressing...
I pretty much agree with your observations, but not this:
The Fed's target zone is 2-4%. In fact, the Fed is having a hard time staying above 2%.
I'm afraid that your "impression" of your shopping cart is humanly logical -- we always notice the bad news -- but not an appropriate indicator for national policy.
Like I said... very interesting post.
Too many questions for a tired mind to address, but...
I think you misinterpreted this statement. It isn't Browne's for one thing and I agree with you Volcker agrees with you as well if you continue to read the next paragraph.
I would ask what do they leave out of the inflation equation as well? We know things that are left out are still a part of the American experience.
I just have to repeat my comments at the end of the comment. My personal opinion is they will not raise them until after the election if a Republican wins the presidency and maintains Congress. Obama's economy hasn't allowed the rates to go up and when he says allows he means set and that was Volcker not Browne who said that.
Volcker realized early in his position with Obama he wasn't dealing with Reagan, so he quit.
I realize the reason for the national policy and that is it isn't what they like us to believe. I'm only expressing the unnamed inflation American families experience and are told by the media and White House etc how we are getting better.
I know they can't, in my opinion, raise the rate or allow them to normalize as that is what is meant either way it is stated because we're at the bottom of the barrel. There is nothing that can be accomplished by raising them and they can't go any lower unless we want to implode. I don't feel the banks are crazy about raising the rates as they are getting free money and still making money off of it without having to pay a decent rate to the investor or even there customers. They are making their investments where the profits are the greatest with free money instead of lending it to the borrower at low rates for the most part.
We've survived during the last 7 years by nearly doubling the National Debt and providing quantitative easing. I expect it will be double or more by the time Obama's term is over because there is nothing to carry it except borrowed money.
At the same time we are inflicting this country with more and more obligations that will last for many years.
We're cut to the bone as Nancy Pelosi says, but we are spending millions of dollars overseas on a credit card to rebuild Mosque overseas. And that is just one of many things.
Not interested in pissing you off, just expressing my feelings about the situation. Actually I'm being very nice.
Unfortunately sometimes you have to bite the bullet or the bullet will eventually come around in hit you in the butt and it is inevitable the longer you wait to face the music the harder it is going to hit.
I don't think Volcker gave up economics over the years. I think he still has a valid opinion and many more years to improve his knowledge. I don't think we have any great economist running the country now.
Yes. And I tried to respond in the same manner. Disagreement doesn't have to be unpleasant. (And besides, I agreed with most of what you said.
I won't argue about inflation. That collapses quickly into he said /she said. The indicators that the Fed uses are historically accurate. You can Google it if you wish.
True. But they can't lend it for much more than 0 because everyone can get money almost free. Their margins are slim. Krugman had a pretty good article on this subject yesterday.
Foreign aid is about 0.15% of the Federal budget. Economically speaking, it is insignificant. (How it is spent is a political subject, not an economic one. I agree that there is much to be said about "how".)
If you could get a 25-year loan at 2%, what would you do?
Once again, I find your post(s) interesting.