Head of Fed’s 5th District, including South Carolina, pushed for higher rates

Jeffrey Lacker, head of the Federal Reserve Bank of Richmond, thinks the U.S. economy is strong enough to withstand higher interest rates.

The Federal Reserve official whose district includes South Carolina is explaining why he cast the sole vote last week to raise interest rates.

The central bank’s Federal Open Market Committee ended weeks of hand-wringing and speculation Thursday by keeping U.S. rates at record lows amid threats from a sluggish global economy, persistently low inflation and unstable financial markets.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, also known as the Fifth District, was the policy-making panel’s only voting member to disagree. He supported raising the target range for the federal funds rate by one-quarter of 1 percent but was outvoted 9-1.

“Interest rates have been near zero for over six years. Even after a quarter-point increase, interest rates would remain exceptionally low, providing ample support for economic growth,” he said in a written statement released Saturday.

A higher Fed rate would eventually send rates up on many consumer and business loans. Lacker said the time was right, “given current economic conditions and the medium-term outlook.”

“Household spending, which has grown steadily since the recession, has accelerated in the last couple of years,” he said. “Labor market conditions have steadily improved as well and have tightened considerably this year. With the federal funds rate near zero and inflation running between 1 and 2 percent, real (inflation-adjusted) short-term interest rates are below negative 1 percent. Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets.”

Lacker acknowledged inflation has been below the minimum 2 percent threshold the Fed has stated it would need to see before beating it back with higher interest rates.

“Since January, however, inflation has been very close to 2 percent,” he said.

While oil prices and currency fluctuations in recent weeks have put more downward pressure on inflation, he said, “this disinflationary impulse is likely to be transitory.”

Also, Lacker said the committee’s vote was inconsistent with the way the panel has responded to economic conditions and inflation over the last few decades.

“This historical pattern of behavior has conditioned public beliefs about how the FOMC is likely to behave in the future, and it has been an essential foundation for the monetary stability we currently enjoy,” he wrote. “Further delay would be a departure from a pattern of behavior that has served us well in the past. The historical record strongly suggests that such departures are risky and raise the likelihood of adverse outcomes.”

The purpose behind the record-low Fed rates was to help the economy mend from the 2007-2009 recession. Lacker described the recovery from that downturn as disappointing in some ways.

“Nevertheless, U.S. economic conditions have improved quite significantly over the last six years, all things considered,” he said. “It’s time to recognize the substantial progress that has been achieved and align rates accordingly.”

Lacker made most of the same arguments during a trip to Charleston in April, when he predicted that the Fed would raise rates in June.

He told The Post and Courier at that time that his philosophy is that a central banker’s job is to close the bar before the party gets out of hand.

Contact John McDermott at (843) 937-5572. The Associated Press contributed to this report. 0