The Fed funds rate target needs to be raised quicker than expected, Federal Reserve Bank of Richmond President Jeffrey Lacker said Tuesday.
"At the present time, I am skeptical of justifications for the large and growing departure of current policy from the policy rule recommendations," Lacker said in a speech at the University of Delaware, according to text released by the Fed. "My own view, as I've said, is that the magnitude of the gap suggests that rates need to rise more briskly than markets now seem to expect. And the elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on. Such an approach would maximize our chance of continuing to benefit from price stability and healthy employment growth."
Lacker reminded that he's long argued that the Fed fund rate target "is exceptionally low and that upward adjustment is needed." He said that is based on benchmarks, or policy rules, that currently "recommend higher interest rates, in most cases substantially higher rates."
While risks are associated with relying on any one estimate, Lacker said, "Taking the range of plausible alternatives into account, my view is that, with unemployment at or below levels corresponding to maximum sustainable employment and with inflation very close to our announced target of 2 percent, significantly higher rates are warranted."
History, he said, suggests that ignoring the benchmarks has risks, including "an unanticipated rise in inflation pressures that necessitates relatively sharp upward adjustments in rates. Such rapid adjustments can be hard to calibrate, and they heighten the risk of overdoing it and sending the economy into an unnecessary recession. In contrast, sustaining unemployment at or below full employment is associated with pre-emptive rate increases, before inflation pressures are clearly visible."
