This Friday central bankers from around the world will gather in Jackson Hole, Wyoming to hear Fed Chairman Ben Bernanke talk about what the Fed can and might do to help the economy. And there are differing views about whether the Fed should do something. A couple weeks back, I spoke with one of the Fed’s so-called doves…who told us there should be more monetary stimulus. Today, we’re joined by one of the Fed’s hawks. Jeffrey Lacker, who heads the Federal Reserve Bank of Richmond. Good morning.
LACKER: Good Morning
HOBSON: Well first of all, how would you describe the U.S. economy right now?
LACKER: The economy is expanding but it’s been expanding at a disappointingly slow pace. It’s something that has been a matter of frustration for a lot of us. There are several reasons for this. I think we built too many homes before the recession so we’re lacking the usual rebound in home construction we usually see. Consumers have been quite cautious of late. Uncertainty about how the fiscal situation is going to be resolved in Washington I think is making it hard to plan and hard to figure out the rate of return on potential projects and I think it’s keeping a lot of people on the sideline and finally there seems to be a problem in the labor market. It doesn’t seem to be as effective as it usually is at matching unemployed workers with vacant jobs.
HOBSON: Well a lot of your colleagues look at that situation and they say it’s time for the Fed to do more monetary stimulus. So do you agree with that?
LACKER: I don’t think we can increase growth much now without increasing inflation through monetary policy and even then I think the affect on growth is likely to be small and temporary. Inflation is under control right now. It’s right where we want it at around two percent. Our job is to keep it that way. We would not be successful if we were to wait until it got a little bit out of control and then brought it back under control because it would require a lot of hardship for American families for us to get inflation back down after it had risen too far.
HOBSON: But isn’t it also your job to keep unemployment down, right? I mean you want to keep full employment and that obviously is out of control right now.
LACKER: The Fed can’t control unemployment. Unemployment is high now relative to its long run averages but the economy has been hit by some tremendously powerful shocks over the last couple of years and that’s what’s keeping unemployment high it’s just been difficult to bring down. We need to be patient. It’s a long costly process.
HOBSON: As you and your colleagues at the Fed go through the decision making process that you have to go through and have had to go through over the last couple of years does it feel like a situation that we’ve been in before? Can you look back to precedent or does it feel like every day is just a brand new thing and you’re not really sure how your decisions are going to play out in the economy?
LACKER: So the fact that we’ve got interest rates at zero is novel. We haven’t had them here since the 30’s and so that makes it a bit difficult. In addition just what the real economy is going through is different. We have new technologies, new industries that didn’t exist decades ago. So yes, it’s always a bit of the same old business cycle but a bit new too. A bit novel as well.
HOBSON: And do you see the light at the end of the tunnel as a moment when America is again really just a shining economy for the rest of the world?
LACKER: I think that’s coming. It may take many years. It may be just a year or two away and I certainly hope it’s sooner rather than later. But I remain confident that the long term prospects for our economy are good. The fundamentals are there. The innovation, the flexibility and resilience of our markets, the educated work force we have. The trick is unleashing all that potential.
HOBSON: Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, thank you so much.
LACKER: You’re welcome.
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