MNI INTERVIEW: Fed Inflation Woes Extend Beyond Tariffs-Lacker

The Federal Reserve has not yet finished the job of taming inflation and cutting interest rates now could reignite price pressures, especially at a time when the central bank’s credibility is under threat from attacks on its independence, former Richmond Fed President Jeffrey Lacker told MNI.

“I think they’ve got an inflation problem apart from the tariff effects. When they started cutting rates last year, inflation stopped falling and they haven’t had any disinflation since,” Lacker said in an interview Wednesday.  

“The underlying ex-tariff inflation rate has not come down, it’s around 3%. It just seems like they ought to be leaning against the inflation pressures more than worrying about downside risks” to employment and growth, he said. 

Instead, Lacker noted that Fed Chair Jerome Powell’s Jackson Hole speech last week all but cemented the prospect of a September rate cut, though uncertainty about the path of policy after that remains.  

“It seems pretty clear they’re headed towards a cut in September,” he said. “They’ve signaled they’re going to take it as the data indicate after that. It’s not clear how they’ll play it.” (See MNI POLICY: Job Revisions Pressure Fed To Cut In September)

JOBS IN BALANCE

The former policymaker took issue with Powell’s focus on downside risks to employment, a shift from the chair's earlier description of the job market as solid.  

“The chair's observations were puzzling to me. He noted that the labor market seemed in balance, because while employment growth was lower, it looks like the demand was growing more slowly and supply was growing more slowly. And that's obviously demonstrated by the stability of the unemployment rate,” Lacker said.  

“But a downside risk is a departure from the steady state that you're on, and if you're in some steady path where demand is growing at the same rate of supply, it's not obvious the risks are any higher. If that growth rate is low and if both of them are growing at a high rate, if the unemployment rate is stable, I'm not sure why lower supply growth would signal downside risk.”

DOLLAR RISK

President Donald Trump’s strong-arming of the Fed to lower interest rates, including public pressure on Powell and most recently the attempt to fire Fed Governor Lisa Cook, is putting the credibility of the American financial system on the line, Lacker said. (See MNI: Experts Say Fed's Cook Will Prevail Against Trump)

“I do think the value of the dollars is at stake. I think that the role of the Treasury market as the market that people pile into whenever there's uncertainty, even if it's uncertainty about the United States, that's in question going forward,” he said. “A replay of something that maybe rhymes with the 1970s if it doesn't replicate it exactly, is a scenario people are going to start taking more seriously if the Fed independence crumbles."

Lacker noted how then-Chair Arthur Burns famously lacked the political will to raise interest rates when it was needed, as Burns himself later confessed. 

“After he left office, he expressed, in his famous speech about the anguish of central banking, that he just didn't feel like he had the political cover, that it would have been politically acceptable for the Fed to do what it needed to do,” said Lacker. “I think we could find ourselves in the same situation – guided by leaders who either aren't willing to do what they need to do to bring inflation under control or don't want to – and that would be a really disturbing outcome, a disturbing place for our country to be in.”