One of the Federal Reserve’s most outspoken officials may not be so hawkish after all.
Richmond Fed President Jeff Lacker said he believes the central bank will not raise its target for short-term interest rates until next year. In an interview in his office this week, Lacker called that scenario “pretty likely,” adding that he does not think the Fed is behind the curve in withdrawing its support for the nation’s economic recovery.
“I don’t see signs of that,” he said.
Lacker will be a voting member of the central bank’s policy-setting committee next year, and his comments suggest he will be amenable to Federal Reserve Chair Janet Yellen’s timeline for hiking interest rates. Many investors believe it will happen around mid-2015, marking the first time interest rates have gone up since the country tumbled into recession. That’s a significant development for an official who has become known for his vocal criticism of Fed policy, dissenting from every decision the last time he was on the committee in 2012. It also underscores the complicated internal politics confronting the central bank as it adjusts to a recovering economy.
Since the crisis, the Fed has adopted an easy-money stance aimed at boosting the country’s fortunes by keeping the target for short-term interest rates near zero and pumping trillions of dollars into the economy. Although those moves have been credited with helping the country avoid another depression, they have also exposed the Fed to criticism -- at times from within its own ranks -- that it is sowing the seeds of future inflation, potentially destabilizing the financial system and overreaching its authority.
The critics have been generally characterized as “hawks,” in contrast to the “dovish” majority who believe the economy still needs help from the Fed. But those brush strokes may be too broad to be useful in the next stage of Fed policy.
Lacker is a prime example. His dissents in 2012 were driven by two factors: discomfort with the Fed’s official commitment to keeping rates near zero and its purchases of mortgage-backed securities to help the housing market. The latter was an inappropriate use of Fed power, Lacker has long argued, in which the central bank effectively picked winners and losers in the credit markets.
“I think matters of very important principles are at stake,” he said in the interview. “We’re in uncharted territory with regard to the expansiveness of how people talk about what the central banks can do and ought to do.”
But now the Fed plans to end that program in October, largely putting to rest one of Lacker’s key concerns. (He is still advocating for the central bank to sell those assets as quickly as possible, however.) As for his concern over the Fed’s commitment to low rates, Lacker acknowledges that inflation has not been a problem so far. That means the likely date of the first rate hike could be in line with what the Fed projected in 2012. But that timeframe is more palatable now than it seemed two years ago.
"This is consistent with the [Fed's] past practice of raising rates pre-emptively, before undesirable inflation pressures actually emerge," Lacker said in a speech last month.
That separates Lacker from the Fed’s other hawks: Kansas City Fed President Esther C. George, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser.
Plosser, in particular, has forcefully argued for the Fed to begin raising rates immediately, calling for an increase to 1.25 percent by the end of the year. A voting member of the Fed’s policy committee this year, he opposed the central bank’s most recent decision on the grounds that it isn’t tightening policy quickly enough. Fisher, also a member of the committee this year, did not dissent but has warned that “I don’t believe there is room for complacency.” George has also been more circumspect, cautioning against the dangers of waiting too long to raise rates but refraining from providing a specific timeline.
Like her predecessor, Ben S. Bernanke, Yellen is reportedly tolerant of dissent but aims to build consensus for the central bank’s decisions. A unified front is particularly useful in moments such as these, when the Fed is trying to shift gears without upsetting financial markets. And the hawk-dove divide may no longer be so clear-cut.