On Friday, April 10, Jeffrey M. Lacker, president of the Richmond Federal Reserve, delivered a generally upbeat economic prediction at a breakfast at the Sarasota Yacht Club. The event, which was presented by the Global Interdependence Center and the Financial Planning Association of the Suncoast and supported by Sarasota’s Cumberland Advisors, drew a group heavy on financial professionals and investors—along with the media, who follow Fed presidents around to every speaking engagement, hoping for some market-rattling revelations. Lacker’s Sarasota remarks—which he took care to note reflected his own opinions rather than those of the Fed—were streamed on Bloomberg and the event was mentioned on CNBC.
Lacker, who has the low-key, scholarly demeanor you’d expect of an economist (and former professor) but was revealed to enjoy competitive race driving in a rebuilt Porsche, began by summarizing his message: solid economic growth for the next few years, an inflation rate headed back towards 2 percent and an increase in the federal funds rate likely in June.
Among his talking points:
- Thanks to a stronger job market and personal income that’s jumped 4.5 percent in the last year, and boosted by a dramatic decline in energy prices, consumer spending is up 3.1 percent since last June. It should stay strong next year—although not quite as strong, since energy prices won’t stay this low for long.
- Job postings have risen and hiring is up, while the “quit rate” has risen by 10 percent. That’s significant, since people don’t leave their positions for a new one unless they’re fairly confident that other opportunities are out there in case the new one doesn’t work out. And a healthy quit rate also boosts productivity, since it leads “to a better match between workers’ skills and their jobs,” said Lacker. Though signals on wage and salary growth are “mixed,” Lacker believes that a stronger labor market inevitably leads to wage and salary growth.
- The outlook is not as bright for the housing market, which is “still sluggish and unlikely to change very quickly,” he said, in part because the recent collapse shook consumers’ confidence in home ownership as a fail-safe investment.
- Business investment has grown by 6 percent and should continue to be robust. Exports, however, are flagging, in part because of the strong dollar (which has probably peaked, he said), and the ongoing decline in federal spending “will continue to restrain growth,” he said. Nonetheless, he said, the higher rates of consumer spending and business investment “will drive the economy forward.”
- Inflation, which has risen by only .3 percent in the last year, will begin to climb back towards the 2 percent Fed target rate. Lacker noted that despite sometimes dramatic fluctuations, the average inflation rate for the last 25 years has been 1.9 percent.
- And for that all-important Federal interest rate, Lacker believes it’s time for a rise. “During contractions, it needs to be lower, and during expansions, it needs to be higher,” he said. The Fed has already said it won’t raise rates at its April meeting, but at its subsequent meeting, in June, “I expect the case for raising rates will be strong,” he said. He quoted a popular joke about the Fed: “The job of the central bank is to take away the punch bowl just as the party is getting started.” In this case, though, it will be more like the Fed stops giving refills, he said, since it will continue to provide plenty of stimulus. “We’ll still be spiking the punch,” he promised.