Jeffrey Lacker: Fed Needs More 'Two-Sided' Guidance on Interest Rates

Fed's Disinflation Optimism and Policy Stance

• 💡 The FOMC has been overly optimistic about disinflation for the past year and a half.
• ⚠️ Current policy is likely more accommodative than the Fed realizes.
• 📈 A productivity surge, if expected to continue, would lead people to spend more today, increasing pressure on economic resources and necessitating higher real interest rates.

Critiquing Administration's Economic Arguments

• 🚫 The idea that inflation is solely a function of temporary tariffs and can be looked through is flawed.
• 💸 Tariffs increase prices, and even if they didn't, the spending would likely shift to other goods and services, driving up prices elsewhere.
• 🗣️ Cherrypicking inflation numbers or dissecting categories to support a narrative is not a sound approach to economic forecasting.

Labor Market and Inflation Transmission

• 📉 While the labor market is growing slowly, both supply and demand are expanding at a similar pace.
• ⚠️ An increase in labor demand can still put upward pressure on costs, regardless of the unemployment rate.
• ⏳ The lesson from the 1970s is that the unemployment rate level does not guarantee protection against inflationary pressures if spending outstrips the economy's capacity.

Proposed Fed Policy and Guidance

• ⏸️ While immediate rate hikes are not recommended, the Fed should provide more balanced, 'two-sided' guidance for the year ahead.
• ⚠️ Markets are anticipating rate cuts, but the Fed must prepare them for the possibility of interest rate increases if inflation does not subside or rises.
• 🧐 Current monetary policy is not perceived as restrictive and may even be accommodative.

Understanding Economic Growth and Potential

• 📊 The Fed uses a benchmark of potential economic activity, often viewed as a slow-moving trend.
• ⚡ However, potential growth is dynamic and affected by economic shocks, making it difficult to reach immediately.
• ⚖️ The Fed may need to adjust interest rates up or down to maintain price stability as growth fluctuates, even if inflation is stable.