Fed’s rebel defends autonomy

To understand the biggest risk facing the Federal Reserve’s future, consider an otherwise mundane photograph in Jeffrey Lacker’s office overlooking a turbulent stretch of Virginia’s James River.

The president of the Federal Reserve Bank of Richmond stands with his predecessors Robert Black and J. Alfred Broaddus Jr in front of a relief of Carter Glass, the Virginia lawmaker who co-wrote the Federal Reserve Act of 1913. Together with their research teams, they created a culture over 44 years that held price stability as first among equals of the central bank’s twin goals, which also includes maximum employment.Richmond’s leadership, and like-minded counterparts at the other 11 regional Fed banks, served as a check against the politically appointed Board of Governors in Washington. They spoke out, and dissented frequently in policy meetings. Black even dissented in favour of tighter money under former chairman Paul Volcker, who raised rates so high to break runaway inflation that he threw the economy into a deep recession in the early 1980s.

In recent years, Lacker has been dismissed by Fed watchers as out of touch with the policy challenge of the moment. Yet right now, this distinctive culture is starting to look valuable because it is up for grabs.With President Donald Trump nominating at least three Fed board governors and possibly a new chair and vice-chair over the next 15 months, Richmond’s independence is being held up as a hallmark strength of the central banking structure that Glass and Congress devised back in 1913.“The reserve banks are the guardians of independence,” said Laurence Meyer, a former Fed governor who now runs a policy analysis firm that bears his name. Meyer said he didn’t always agree with Lacker’s hawkish approach, but “you want that view represented and he did it well.”

Lacker is a Ph.D economist and investors understood his views within the framework of the rate-setting Federal Open Market Committee (FOMC). The worry now is that new Fed appointees may not have much of a framework at all, which could erode years of effort by the Fed to move policy to a system that investors understand.Given the “massive” transition facing the central bank, “it is hard to have a tremendous amount of certainty about what the Fed will look like or act like next year,” said Michael Gapen, chief US economist at Barclays in New York.

There are several worsening trends that new Fed leaders will face that helped nurture the populist support that put Trump in the White House.An index of inequality has moved higher in each of the past three years. Unemployment is low, but wage growth is sluggish because productivity is weak. Minorities in particular are struggling, and America’s cherished promise that if you work hard you can move up appears increasingly out of reach.If a country can’t use fiscal policy to repair itself because of congressional disputes over spending, it looks toward institutions that can sidestep the deadlock. And that includes the Fed.

Activist coalition Fed Up has urged the Fed to target wage growth and grant low-rate infrastructure loans to cities and states. Such pressures aren’t likely to recede.
The Fed on occasion has been forced to choose “between protecting inflation stability and efforts that are urged on us to do something to improve the lot of the common person,” Lacker said in an interview in his office on March 24. “Those are really treacherous times for a central bank.”

Lacker, 61, will retire in October after 13 years as president. The Richmond Fed’s board has never chosen a president from outside the bank. That trend is changing system-wide, however, with appointments in Minneapolis, Philadelphia and Dallas all comprised of outsiders. Regional Fed presidents are picked by the directors of that particular bank, subject to approval by the Fed Board. — Bloomberg