–Inflation Running Between 1% To 2%; ‘Unlikely To Stay That Low’
–U.S. On A Sustainable Upward Trajectory
By Brai Odion-Esene
WASHINGTON (MNI) – Richmond Federal Reserve President Jeffrey
Lacker Tuesday warned that the public’s expectation of higher future
inflation means the central bank must not wait too long before
tightening monetary policy.
In remarks prepared for the Second Annual Piedmont Triad Economic
Development Summit in Greensboro, N.C., Lacker also said the most recent
GDP report supports the idea that the U.S. is on a sustainable upward
trajectory, and that employment is on the path to steady growth.
Lacker did not add to comments made last week when he said it may
make sense for the Fed to begin normalizing its balance sheet in advance
of raising rates. He did repeat his warning that policymakers should not
allow inflation to lull them into a false sense of security.
“Inflation, the best we can measure it, has been running between 1
and 2 percent since early last year. Although some recent readings have
come in below that range, I believe inflation is unlikely to stay that
low,” Lacker said.
And with the public apparently expecting higher inflation in the
future, “policymakers will need to be careful to avoid waiting too long
to raise rates,” he cautioned.
Lacker painted a positive picture of the U.S. economy, saying
recent GDP data “supports the idea that we’re on a sustainable upward
trajectory.”
This view is supported, he said, by consumer spending that is now
clearly on an upswing — rising by an annual rate of 2.2% in the second
half of 2009, and last quarter it increased by 3.6%.
“That turnaround is likely to be durable, in my view,” Lacker said.
Consumer spending is not the only thing on an uptick, he continued,
noting the rise in business equipment and software spending that he
expects to rise this year and beyond.
Lacker also sounded a positive note on the jobs front, saying,
“This time, though, we are already seeing evidence that employment is on
the path to steady growth. … the pickup in demand that is already
underway is likely to keep employment on an upward trajectory.”
Downside risks do remain, such as residential construction, a
sector that Lacker warns may not be a major contributor to growth in the
near-term. The same applies to nonresidential construction, which he
says will continue to be “very soft” for an extended period.
It will also take some time to make “substantial progress” on the
unemployment rate (now at 9.9%), Lacker said, especially as an improving
economy will encourage more to return to the labor force.
Lacker cautioned, however, that month-to-month movements in the
unemployment rate can be misleading in the early stage of a cyclical
recovery, arguing that employment growth can provide a better read on
labor market trends.
“And there, as I said, the recent news has been encouraging,” he
concluded.
** Market News International Washington Bureau: 202-371-2121 **
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