Fed's Lacker sees case for fur­ther rate hikes

The Pak Banker - - COMPANIES/BOSS -

Rich­mond Fed­eral Re­serve Pres­i­dent Jef­frey Lacker said on Wed­nes­day there is still a case for rais­ing in­ter­est rates fur­ther, a sign the cen­tral bank could have a live de­bate next month over whether to raise in­ter­est rates.

Fol­low­ing nearly two months of fall­ing global equity prices and mount­ing con­cerns over a global eco­nomic slow­down, in­vestors see al­most no chance the Fed will raise rates at its March 1516 pol­icy meet­ing. Lacker did not com­ment on the tim­ing of fu­ture hikes but he said he saw no ev­i­dence a U.S. re­ces­sion was im­mi­nent and made clear he thought the Fed needs to raise rates to keep fu­ture in­fla­tion from ris­ing too high.

He ar­gued that es­ti­mates of the econ­omy's so­called nat­u­ral real rate of in­ter­est, the rate when econ­o­mists think there will be nor­mal eco­nomic growth rates and sta­ble in­fla­tion, is at or just above zero.

"This per­spec­tive would bol­ster the case for rais­ing the fed­eral funds rate tar­get," Lacker, who is not a vot­ing mem­ber on the Fed's rate-set­ting com­mit­tee this year but par­tic­i­pates in its dis­cus­sions, told a univer­sity gath­er­ing in Bal­ti­more.

Lacker's speech fol­lowed com­ments by Kansas City Fed Pres­i­dent Es­ther Ge­orge on Tues­day that the Fed should con­sider rais­ing rates in March. Ge­orge has a vote on the Fed's pol­icy com­mit­tee this year. Ge­orge and Lacker are among the Fed pol­i­cy­mak­ers who most urge an ac­tive fight against fu­ture high in­fla­tion, or "hawks" in cen­tral bank­ing par­lance.

In his speech, Lacker ar­gued against the view that in­fla­tion is ex­pected to fall well short of the Fed's 2 per­cent tar­get in com­ing years.

Many econ­o­mists and in­vestors think low in­fla­tion ex­pec­ta­tions and height­ened fi­nan­cial mar­ket volatil­ity will lead the Fed to leave in­ter­est rates un­changed in March and pos­si­bly for the rest of this year, de­spite the sig­nal pol­i­cy­mak­ers gave in De­cem­ber that they could hike four times in 2016. But Lacker said that eco­nomic anal­y­sis sug­gests in­fla­tion could av­er­age 1.9 per­cent in the pe­riod be­tween 5 years and 10 years from the present. Fed pol­i­cy­mak­ers ap­peared di­vided at their last pol­icy meet­ing in Jan­uary when they held its bench­mark rate at be­tween 0.25 per­cent and 0.5 per­cent but dis­cussed hik­ing rates as well as chang­ing their views on the fu­ture path of pol­icy.

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