NEW YORK – The time to tighten monetary policy is when “economic growth is strong enough and well-enough established, even if it is not yet especially vigorous,” Federal Reserve Bank of Richmond President Jeffrey Lacker said today.
Addressing the Virginia House Appropriations Committee, Lacker said, “it is hard to predict when that will occur,” according to prepared text of his remarks, which was released by the Fed.
Inflation is about 1.5%, which Lacker called “ideal.” He noted there is little risk of inflation falling further.
“The historical record suggests that the early years of a recovery is when the risk is greatest that confidence in the stability of inflation erodes and we see an upward drift in inflation and inflation expectations,” he said. “This risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion.”
While the Fed has the tools to remove such stimulus, Lacker said, the harder decision is when and how rapidly to remove stimulus. “There is no doubt that we must be aware of the danger of aborting a weak, uneven recovery if we tighten too soon. But if we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery,” he said. “In assessing when we will need to begin taking monetary stimulus out, I will be looking for the time at which economic growth is strong enough and well-enough established, even if it is not yet especially vigorous. Although it is hard to predict when that will occur, I can confidently predict that economic policymaking, both for you and for me, will remain particularly challenging for some time to come.”
