A slow recovery

Richmond Fed president predicts national economic growth of 3 percent or less

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Print this page by Robert Powell

Jeffrey M. Lacker’s office at the top of the Federal Reserve Bank of Richmond gives him a panoramic view of the city and the James River.

The view is an apt fit for the oversight role Lacker plays as part of the Federal Reserve System. He is one of 12 regional Federal Reserve presidents who rotate as voting members of the pivotal Federal Open Market Committee (FOMC). The committee, headed by Fed Chairman Ben Bernanke, meets regularly to set interest rates and use other financial levers to prod the economy while keeping inflation in check. Lacker will not become a voting member again until January but he participates in discussions at the FOMC meetings.

As is the case with all top Fed officials, Lacker’s speeches are closely scrutinized by the financial markets for hints of where Fed policy might lead.

In a recent speech to the Dulles Regional Chamber of Commerce, he said that the U.S. normally grows at a rate of 5 to 6 percent coming out of a recession but noted that a number of indicators suggested current growth may be slower.
Recently revised information about the nation’s gross domestic product during the first and second quarters has prompted him to accept lower expectations for the economy.  “I think the economy is going to continue to grow, but I think it’s going to be growing very slowly and haltingly,” he says, predicting growth of 2½ or 3 percent.

At its FOMC meeting in early August, the Fed announced plans to keep interest rates at near zero until mid-2013. The decision drew dissenting votes from three Fed bank presidents, Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia. “I think low interest rates right now are warranted,” Lacker says.  “But I was hesitant about committing implicitly to a particular date on the calendar.”

In June, the Richmond Fed (whose district includes Virginia, Maryland, West Virginia, South Carolina, North Carolina and the District of Columbia) made news on its own. It flew a rainbow-colored flag on its grounds at the request of a bank employee group in observance of Lesbian, Gay, Bisexual and Transgender Pride Month. The decision to fly the flag drew sharp criticism from Republican Del. Bob Marshall of Prince William County and the Family Foundation.
“We’ve paid a lot of attention to diversity inclusion recently,” Lacker says. “And flying the flag for us symbolized that we don’t discriminate against anyone, much less lesbians and gays.”

Lacker, 56, a native of Lexington, Ky., has been president of the Richmond Fed since 2004. He earned a doctorate in economics from the University of Wisconsin and was an assistant professor at Purdue University before joining the bank in 1989. He was senior vice president and director of research before succeeding former Richmond Fed President J. Alfred Broaddus Jr.

Lacker is a member of the executive committee of Venture Richmond and serves on the boards of the Council for Economic Education, the Richmond Jewish Foundation, the World Affairs Council of Greater Richmond and Richmond’s Future. He and his wife, Lisa Halberstadt, have two sons, Benjamin and Daniel.

Virginia Business interviewed Lacker in August before the FOMC most recent meeting in late September.

Virginia Business: [Federal Reserve Chairman Ben] Bernanke has said that the Fed stands ready to help the economy if necessary.  But what more can the Fed do?

Lacker: We’re in a tough spot because there isn’t a lot we can do to help with the problem of economic growth and unemployment.  And the main tool we have is our balance sheet, and the main influence that has is over inflation. 

A year ago, inflation was low and threatened to go lower.  But now inflation is running 2 percent, maybe a little under that.  And more stimulus [spending] now would run the risk of raising inflation above where we’d like to see it and probably wouldn’t have much of an effect on growth, [according to] the best estimates I’ve seen.

So we’re in a spot where the economy is facing some challenges, but they’re not challenges that monetary policy is capable of doing much about.

VB: Do you agree with the Fed’s plan to keep interest rates low through mid-2013?

Lacker: I think low interest rates right now are warranted.  But I was hesitant about committing implicitly to a particular date on the calendar.

VB: If you were [a voting member of the Federal Open Market Committee] at the time, would you have been one of the dissenters?

Lacker: The luxury I have not being a voter is that I don’t have to decide whether I would have dissented or not.  Having said that, I don’t think more monetary stimulus is warranted right now.  And that change in language in effect constituted a small measure of stimulus.

VB: What is your outlook on the national economy going forward for the rest of this year and into next year?

Lacker: I think the economy is going to continue to grow, but I think it’s going to be growing very slowly and haltingly. 
There seem to be significant challenges in the way of more robust growth.  I think consumers are gradually repairing their balance sheets, gradually deleveraging, gradually saving enough to have a balance sheet that’s healthy enough for them to feel comfortable expanding spending. 

Businesses have found a lot of opportunities to invest in new equipment and software.  That has been a source of strength for the economy.

With the value of the dollar what it is, demand for our exports has been relatively strong and a good contributor to growth lately. 

On the other hand, the housing sector is not contributing to growth measurably at all.  And the housing market is going to be weak for several years. 

And state and local governments and the federal government have been cutting back spending and laying off workers.  That’s going to be a source of weakness as well.

When you add it all up, the picture you get is of very moderately paced growth.

VB: Has your opinion changed any since [your recent speech to the Dulles Chamber of Commerce]?

Lacker: It has.  When I spoke in Dulles that was before the release of the benchmark revisions of GDP.  We get a release every month, but once a year we get a revision that’s pretty comprehensive and goes back several years.  And this revision was particularly noteworthy because it painted a picture of an economy that contracted by more than we thought in the recession and has been growing more slowly than we thought since then.  And that, combined with some other indicators that have come in since my Dulles speech, has led me to place more weight on the possibility that growth at about 2½ or 3 percent might be all we get for some time. 

At Dulles, I was contrasting that with what’s typical after a recession, which is the growth is above trend 5 or 6 percent for some time.

VB: If we do have that kind of slow growth, how are we going to create enough jobs to lower unemployment?  How long is it going to take then to lower unemployment if we don’t have faster growth?

Lacker: Well, there’s no question that, the lower growth rate, the longer it’s going to take to cut into the sort of backlog of unemployed workers who are looking for work.

There are a lot of challenges to reducing the unemployment rate.  One of the biggest is a mismatch between the skills that businesses that are looking to expand are looking for in a work force and the skills of the people who are unemployed.  A lot of them were laid off from industries or occupations where we just don’t need as many people with those skills, and there are some particular skill areas where the labor market is kind of tight.

More broadly, though, that’s not the whole story.  There seem to be some impediments to the willingness of businesses to make a commitment on investment or substantial new hiring.  I think there are factors in economic policy that are clouding the outlook, [such as] uncertainty about how the federal deficit situation is going to be resolved, whether it’s going to mean higher taxes or not, and uncertainty about the future course of some regulations that are really important to small- and medium-size businesses.  The health-care legislation is one example, and environmental regulations are another one.

So there seems to be some uncertainty there that’s impeding the growth process.

VB: Coming down from the national outlook, what about the Fifth District, particularly Virginia? What sort of prospects for the regional economy do you see?

Lacker: Overall prospects in Virginia look bright. Now there are significant differences across regions, but for the last couple of decades we’ve done better than the national economy, and I think we’re going to continue to do that.

Washington, D.C., and the Northern Virginia area have fared better than almost all other big cities in the country, in part due to the strength of government spending over that time period.  Now the cloud over the federal deficit issue could mean some scaling back of government spending that flows through Northern Virginia, but the base of companies focused on technology and telecommunications, for example, I think is going to keep that area fairly strong.

The Hampton Roads area is going to be hit a little harder if there are defense cutbacks, and it’s not clear how big those cutbacks might be.  But it is a little bit vulnerable to how the budget negotiations come out later this year.

Southside Virginia is facing struggles.  There are some bright spots down there. But it’s going to be a difficult, challenging transformation process with a lot of workers that have been shed from relatively unskilled manufacturing jobs.  There is a willingness by firms to put manufacturing operations there, but the type of skills they’re looking for in workers is a little bit different.  So there’s an adjustment period going on down there.

But overall, I think there are a number of factors that should keep us stronger than the country as a whole.

VB: The idea of more quantitative easing, “QE3,” keeps being thrown around.  I noticed from your Dulles speech that you really didn’t feel like that was enough to help the economy and might, in fact, cause more inflation.  Is that still your position?

Lacker: Further stimulus in the form of expanding our balance sheet seems to me likely to cause inflationary pressures to rise but not likely to do much for growth and unemployment.  That’s still my view right now.

In addition, inevitably, increasing our balance sheet further is just going to complicate matters when the time comes to withdraw economic stimulus.

VB:  With the [debt ceiling] deal, there is, of course, this committee that’s supposed to come up with further cuts.  If they don’t, then there’s going to be an automatic cut in federal spending.  Is that kind of broad-stroke drop in federal spending more likely to help the economy or stall it?

Lacker: My sense is that it’s not likely to do as well for us as same-size cuts that have been carefully chosen, because there are some programs and there are some tax expenditures that are good and not so good.  Some careful ranking of priorities, I think, would pay off.  Particularly for Virginia, the across-the-board cuts that are built into the triggers if there isn’t an agreement on a new budget are weighted more heavily towards defense than a lot of people think a budget deal would produce.  And so if we went down the path of having those triggers invoked, I think the state might feel a little bit more pain than otherwise.

VB: What about the country as a whole, the national economy?

Lacker: I think you’d notice it in sort of the mix of activity as things go forward.  The general, the big-picture effect of the cuts will be there.  The idea is that it frees up resources, it balances our budget, takes away the uncertainty about whether financial markets are going to withdraw from U.S. Treasuries or not, and gets us more on an even keel and a sustainable trajectory.  By freeing up resources, what it means is that the growth you get is going to be more private sector oriented, more oriented towards innovation, more oriented towards productivity improvements than you might otherwise get.  And around the margin, getting to choose your cuts rather than take an across-the-board cut means that you get to save programs that are good, that have proven their usefulness, and you’re able to eliminate programs entirely that don’t pass the test.

VB: Another thing that you touched on in the Dulles speech was the uncertainty among businesses because of regulatory environment.  Have Obama Administration policies hurt the economy?

Lacker: Well, I don’t want to make a blanket statement like that.  I don’t think it’s warranted.  But there are some areas in which, for whatever their benefits, changes in regulations are having a deleterious effect on investment and growth.  And those have to be tallied against the presumed benefits of those regulations to get a sense of whether they’re a good thing or not.  I’m just pointing out that one of the things holding down growth is people are not quite sure how some of these regulations are going to shake out.

VB: One of the other things that I’ve seen surface recently is talk about some countries moving away from the dollar as a reserve currency.  Is the dollar in danger of losing its status as the reserve currency?

Lacker: I don’t think we’re close at all to losing out status as reserve currency.  There are some other currencies that I think some countries might want to diversify into.  We might see them diversify into other currencies as a matter of prudence, but I think the dollar’s pre-eminent place in the international monetary order is likely to remain for some time to come.  A symptom of that is that, for virtually any pair of currencies in the world, it’s cheaper to go from one currency to the dollar then to the other currency than it is to go directly between currencies.  And that’s going to sustain a huge demand for dollars and a pre-eminent place.

VB: In connection with that, this summer was the 40th anniversary of going off the gold standard.  In hindsight, was that a mistake?

Lacker: No, I think going off the gold standard was inevitable.  The real problem is that I don’t think governments or central banks were really prepared for the challenges ahead of them in a world without a gold standard. 

The standard we were on between World War II and ’71 was a kind of a hybrid system where we were tied to gold, but occasionally we would adjust the tie.  So it’s different than the old gold standard.  And it became unsustainable because of speculative attacks and uncertainty about whether someone would revalue their currency by 10 percent or not.  It became destabilizing rather than stabilizing.  And it became hard for us to sustain what we were trying to do in foreign exchange markets as well.

So what we have now is a system where you don’t have that anchor that ties down people’s expectations about what money is going to be worth in the long run … What anchors the system now is the commitment of central banks, a commitment that’s sustained by a measure of independence and insulation from political pressures to inflate.  And it’s an independence that’s always contingent because it can always be revoked by Congress, but the system has proven since the 1970s to be a workable way to sustain price stability.

VB: One thing I’ve got to mention is the flag story.  Why did the bank fly the [rainbow-colored] flag?  And is it something you plan to do again?

Lacker: We flew the flag on a request from one of our employee resource networks.  We’ve paid a lot of attention to diversity inclusion recently.  And flying the flag for us symbolized that we don’t discriminate against anyone, much less lesbians and gays.  And for us, it symbolizes a commitment to be an inclusive place where we value your professional contributions despite what diverse background or characteristics you may have.

VB: I’ve seen the criticism.  Did you have good feedback as well?

Lacker:  Oh, yes.  We had a lot of very positive feedback.  For a lot of people, it was very meaningful to see us fly the flag. 


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