Lacker Says Fed May Need to Increase Rates Even With Elevated UnemploymentSubmitted by DeMolay on Sun, 11/14/2010 - 22:00
Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank may need to tighten monetary policy even with the U.S. unemployment rate elevated to avoid a surge in inflation similar to the 1970s.
“At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards,” Lacker said today in a speech in Richmond, Virginia. “The decisions we make at that time will be the true test of whether we’ve learned our lessons.”
The central bank on Nov. 3 said it would buy an additional $600 billion of Treasuries through June, expanding record stimulus to try to reduce 9.6 percent unemployment and keep inflation from dropping. Chairman Ben S. Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness close to a 26-year high.
“It is not the high level of unemployment alone that motivated the action, but rather the slow pace of improvement and the belief that further monetary stimulus could help,” Lacker said.
The U.S. added 151,000 jobs last month as employment gained for the first time in five months, while the jobless rate held steady. The unemployment rate may average 9.3 percent in 2011, according to the median forecast of 52 economists surveyed this month by Bloomberg News.
“Risks remain, especially those associated with inadvertently creating false expectations that the Fed is preoccupied with achieving a specific level of the unemployment rate,” Lacker said at the 2010 International Conference for Advanced Placement Economics teachers.
Lacker described the current level of unemployment as “very high,” adding, “the consensus outlook for a relatively slow recovery in economic output -- growth in the 2.5- to 3- percent range in the next year -- suggests that progress toward more desirable rates of unemployment may continue to be slow.”
Fed officials are debating why unemployment is persisting close to 10 percent. Dallas Fed President Richard Fisher says businesses are holding back because of uncertainty over new regulations, such as health-care reform, and Narayana Kocherlakota of Minneapolis says a mismatch of worker skills and jobs is contributing to the problem.
Others, led by Bernanke, say weak demand is a primary cause. “The pace of structural change is not greater than normal,” he said in a speech in Boston last month, and “the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity.”
“Inflation recently has been quite low,” Lacker said.
The Fed’s preferred gauge for consumer prices, which excludes food and energy, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation they see as consistent with achieving legislative mandates for maximum employment and stable prices.
The Fed said after its latest meeting “the unemployment rate is elevated, and measures of underlying inflation are somewhat low” compared with its mandate. “Progress toward its objectives has been disappointingly slow.”