Larry McMurtry’s “Lonesome Dove,” the epic novel about the American West, corralled a Pulitzer Prize in 1985.
Thirty years later, Jeffrey Lacker has lassoed himself a lesser-known distinction, that of “Lonesome Hawk.” Instead of driving cattle from Texas to Montana, he’s been prodding a posse of U.S. central bankers to hop off the cheap-money wagon train.
Lacker isn’t a household name. He runs the Federal Reserve Bank of Richmond, also known as the Fifth District, which includes South Carolina. Considered an inflation hawk because he’s fixated more on runaway prices than growth, he made a minor splash in monetary circles 10 days ago.
The central bank’s Federal Open Market Committee ended weeks of hand-wringing and tea-leaf-reading Sept. 17 by keeping U.S. interest rates at record lows amid threats from the sluggish global economy, persistently tepid inflation and choppy stock markets.
Lacker was the policymaking panel’s only voting member to break from the pack. He put his inflation-fighting instincts to the test by calling for a rate increase of one-quarter of 1 percent. His proposal was shot down in a 9-1 vote. Stocks tanked afterward.
Lacker explained why he went out on a limb in a little-noticed written statement he released last weekend.
“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.
The Fed has kept rates at record lows to help the economy mend from the 2007-09 Great Recession. A bump would eventually make many consumer and business loans more expensive for borrowers.
Lacker said the time is right for the Fed to get off the dime “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 in his statement. “Labor market conditions have steadily improved as well and have tightened considerably this year.”
He further argued that, on an inflation-adjusted basis, short-term rates are likely 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,” he said.
His argument was undermined by the inflation rate, which Lacker acknowledged isn’t a cause for alarm, at least not yet. It remains below the 2 percent growth threshold the Fed has stated it would need to see before ratcheting up rates.
“Since January, however, inflation has been very close to 2 percent,” Lacker said.
And while oil prices and currency fluctuations in recent weeks have put more downward pressure on inflation, he said, that “is likely to be transitory.”
Lacker isn’t saying the U.S. economy is going gang-busters. He described the recovery from the recession 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 points during a trip to Charleston in the spring, when he raised the possibility that the Fed could boost rates at its June meeting. He told The Post and Courier that his job as a central banker is to close the bar before the party gets out of hand.
His fellow policymakers seem to be warming up to the idea.
Richard Bullard, who runs the St. Louis Fed but who currently doesn’t have a vote on interest rates, said he would have sided with Lacker if he could have.
“I would have dissented on this decision,” Bullard told the cable TV network CNBC on Monday.
Dennis Lockhart, the Fed’s Atlanta president, chimed in that same day, saying rates could still rise this year.
Fed chair Janet Yellen said as much Thursday. Inflation is likely to creep up to 2 percent, and weakness in the global economy isn’t likely to deter the U.S. from raising interest rates from their record lows, she said in remarks at the University of Massachusetts at Amherst. Stocks rallied on the news Friday.
The Lonesome Hawk may have landed a bit early. But suddenly he has plenty of company.
Contact John McDermott at 843-937-5572.