The Fed may have to raise rates to 5% to control inflation – Jeffrey Lacker

Former Richmond Fed President Jeffrey Lacker has said in an interview with MNI on Monday, “my feeling is that they have to go to 5% before they can really think they are at a neutral point“.

Additional comments

“Even at the current aggressive pace of 50 basis points per meeting, they’re not going to get to that until the middle of next year.“.

“Fed officials have said they would like to bring policy rates, currently in a range of 0.75% to 1%, to more neutral levels ‘quickly.'”

“But those responsible for monetary policy have defined neutrality in nominal terms under the assumption that the inflation rate will eventually return to the Fed’s 2% target. That’s a big assumption.”

“3% is fine as a neutral rate if inflation is already 2%. But if not, then 3% is not neutral. What is neutral depends on what is the current rate of inflation, what is the current rate , which is expected to be in the next two quarters.”

“In the September meeting the data was very clear that they had to move. But they were hampered by their forward guidance and this commitment to reduce asset purchases. That’s what held them back until March.”

“I think they are six months behind the curve. They are making up for it quickly and hastily. But it is not an immediate compensation because you cannot recover from the fact that expectations have filtered into the markets, wage rates have accelerated during the winter and companies have become accustomed to valuing cost increases, passing them on as increases in prices.”

“I am somewhat pessimistic about its ability to reduce inflation without triggering a recession.. It seems very unlikely to me that they can.”

“The signs that inflation is coming off its peak are extremely timid, nothing to take to the bank. It seems very unlikely that they are going to get inflation down.”