–Lacker Watchful On Inflation But Does Not See Automatic Hyperinflaton
By Sheila Mullan
NEW YORK (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker Tuesday night said he believes that overall inflation will
be “gradually firming” to a range of 1.5% to 2.0% with risks both to
the upside and the downside.
However while he said there is always the risk of “hyperinflation”
and said the Fed must watch for it, it is not necessarily as much a
certainty as some might think.
He added that “my sense is the most likely outcome is inflation
gradually firming to 1.5% to 1.5% to 2.0%” but added that “there are
risks on both sides of that outlook.”
He added that “I think inflation is low as measured by the core
inflation. Right now. I am more sanguine about the overall inflation …
. I think that is just fine.”
He spoke at a Franklin & Marshall College alumni event, which drew
a few hundred people and included a panel discussion with SEC Chairwoman
Mary Shapiro.
“The inflation outlook is a difficult aspect of monetary policy,”
said Lacker. “We are in uncharted territory of policy; we have
increased the monetary base tremendously. and there are a lot of people
that just look at that and jump to the conclusion that hyperinflation is
in train. That is a little bit of an overreaction.”
He continued, “Are there upside risks? I have been saying this, for
a couple of years now. We’re in the recovery phase, the most delicate
part of the monetary policy because you have to time the withdrawal of
monetary stimulus just so, to keep inflation from rising. That is
something that we have missed, sometimes in the past.”
Lacker said that between 1999 and 2009, and especially around the
financial crisis, “we have seen a tremendous expansion” in aid for
financial institutions and added that “there still is this potential for
constructive ambiguity” about how much aid a troubled institution will
receive that needs to be clarified.
Lacker said sometimes the current Fed will need to be like the Fed
in the 1970s, where it said it wanted to cut inflation but at first did
not take tough measures, but then did in fact hike rates aggressively to
break down inflation.
Similarly the Fed needs to “endure’ and show that it too can be
tough in crises and not overly lax in aiding troubled institutions, he
said.
In the 1970s to beat inflation, the Fed decided to “incur some
costs in the short-run” and the situation is similar now, not
specifically in terms of inflation, but in terms that the Fed must be
tough enough to stand up and not be overly lax in extending aid to
financial institutions, he said.
He added also that “I think there is a likelihood, I”m not sure how
much it is, of further financial crisis, of further financial turmoil,
at some point” but the Fed should not necessarily jump in to extend aid
to all financial institutions in such an outcome.
He said the Fed is “cognizant” of its eventual challenge to
withdraw stimulus at some point.
–By Sheila Mullan, 212-669-6432 smullan@marketnews.com
** Market News International New York Newsroom: 212-669-6430 **
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