Lacker Says Fed May Have to Tighten With Unemployment at 7%

By Joshua Zumbrun and Matthew Winkler - May 2, 2012 12:29 AM GMT+0700

Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank needs to be ready to raise interest rates even if joblessness exceeds 7 percent.

Speaking in an interview today at the Bloomberg Washington Summit hosted by Bloomberg Link, he said the Fed will probably have to raise rates in mid-2013. Adding more monetary stimulus now would raise inflation risks without doing much to boost growth, he said.

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Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks at the Bloomberg Washington Summit in Washington, D.C. on May 1, 2012. Photographer: Joshua Roberts/Bloomberg

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May 1 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker talks about the outlook for the U.S. economy, monetary policy and the banking industry. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Unemployment “could well be above 7 percent, and I think we have to prepare for that,” Lacker said. “I think it’s a misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.”

Lacker has cast the only dissenting vote at each of the Federal Open Market Committee’s policy meetings this year. He has opposed the Fed’s statement that economic conditions will probably warrant “exceptionally low” levels of the federal funds rate at least through late-2014.

It is “really tricky” for the Fed to find “that time when interest rates need to rise to prevent inflation pressures from emerging, before you see them emerge, before you see inflation move up steadily,” he said.

Lacker said he expects economic growth to accelerate, although “it’s not a gangbusters recovery by historical standards.”

Labor Markets Healing

“Labor markets are likely to continue to heal, the unemployment rate is likely to continue to fall,” he said. “That’s going to lead to consumers, households having greater confidence over time.”

Stocks have rallied on better-than-forecast corporate profits and signs of economic strength. The Standard & Poor’s (SPX) 500 Index has risen more than 12 percent this year, the best start to a year since 1998.

The index rose 1.1 percent to 1,413.82 at 12:56 p.m. in New York after a report showed that U.S. manufacturing unexpectedly expanded in April at the fastest pace in 10 months.

Yields on 10-year Treasury notes rose from almost the lowest level in three months after the figures, climbing 4 basis points, or 0.04 percentage point, to 1.95 percent.

Employers increased payrolls by 635,000 from January through March, the biggest quarterly gain since the first three months of 2006.

Jobs Report

The Labor Department will release its April jobs report on May 4. The economy added about 160,000 jobs and the unemployment rate held at 8.2 percent, according to the median forecasts in a Bloomberg survey of economists. In March, employers added 120,000 jobs, the fewest since October.

Economic growth in the U.S. slowed to a 2.2 percent annual pace in the first quarter from 3 percent in the final three months of 2011, according to a Commerce Department report last week. While the biggest gain in consumer spending in more than a year helped bolster growth, it was restrained by a diminished contribution from business inventories and a drop in government spending.

Fed Chairman Ben S. Bernanke last week said the central bank is “prepared to do more” if needed to boost the economy, after leaving its policy unchanged. Lacker said more Fed stimulus would be unwise.

“For us to provide more monetary stimulus at this point would likely raise inflation risks and not likely do much for growth,” Lacker said.

Second-Longest Serving

Lacker, 56, has been president of the Richmond Fed since 2004 and is the second-longest serving among all 12 regional bank presidents after Cleveland’s Sandra Pianalto. He was an assistant professor of economics at Purdue University in West Lafayette, Indiana, before joining the Richmond Fed in 1989 as an economist in the research department.

Central bankers last week upgraded their forecasts for economic growth and unemployment.

Officials forecast the jobless rate would average 7.8 percent to 8 percent in the final three months of this year versus a forecast of 8.2 percent to 8.5 percent in January, according to central tendency estimates. The new forecasts are still far above policy makers’ estimates for full employment, which range from 4.9 percent to 6 percent.

Fed officials estimated the economy will expand 2.4 percent to 2.9 percent this year, compared with a January forecast of 2.2 percent to 2.7 percent.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Matthew Winkler in New York at mwinkler@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net