Richmond Fed President Central Bankers Can Spur Economic Growth

first_img Share Economic Growth Federal Reserve Bank of Richmond Inflation Monetary Policy 2016-02-24 Staff Writer Richmond Fed President: Central Bankers Can Spur Economic Growth President of the Federal Reserve Bank of Richmond Jeffrey M. LackerIn a speech today at the Johns Hopkins Carey Business School, President of the Federal Reserve Bank of Richmond Jeffrey M. Lacker discussed monetary policy, inflation, and how the central bank can help spur economic growth.The biggest takeaways? That inflation may soon rise, and central bankers have a responsibility to keep it stable.To begin, Lacker started by addressing a common concern: That an economic recession is impending, and central banks—along with their low interest rates—are likely to blame. These concerns, he said, “presume that monetary policy has a significant direct effect on economic growth—a presumption, I will argue, that is based on a misunderstanding of what monetary policy can and can’t do.”He continued: “Monetary policy’s ability to affect real economic activity—when monetary policy is being reasonably well-executed—can be quite limited and is almost always short-lived,” Lacker said.“The role of the Fed is not to prevent every recession or to soothe every instance of financial instability, nor is it within its power to do so. Central banks garner too much praise when times are good and too much blame when times are bad.” -President of the Federal Reserve Bank of Richmond Jeffrey M. LackerBut poor monetary policy, Lacker said, can create real problems.“Poor monetary policy that leads to high and widely varying inflation can impede economic growth in a number of ways,” Lacker said. “Monetary policy can have a sustained positive effect on economic growth by avoiding the negative consequences of poor monetary policy. This requires low and stable inflation.”Achieving this stable inflation is harder than it once was, Lacker said, especially since the housing bust.“Reconciling the behavior of monetary measures with the behavior of inflation has been more difficult since the crisis,” Lacker said. “The dramatic increase in the Fed’s monetary liabilities after 2008—from just under $1 trillion to over $4 trillion now—caused concern that surging inflation was imminent. That hasn’t happened. Inflation has not only failed to rise, but has been persistently low relative to the FOMC’s stated goal of 2 percent. The last reading of 2 percent or greater for the 12-month change in the personal consumption price index was in April 2012, and since 2013, the core index has fluctuated between 1.3 and 1.7 percent.”The index may creep closer to the 2 percent goal in the next few years however. According the New York Fed’s Survey of Consumer Expectations, consumers expect it to average 2.5 percent over the next five years, while the University of Michigan’s survey predicts 2.4 percent for the next five years.“Both these measures of expectations have declined slightly recently,” Lacker said, “but overall remain consistent with the Fed’s inflation target.”To wrap up, Lacker summed up his thoughts on the Fed, along with its role in maintaining a stable financial environment.“The role of the Fed is not to prevent every recession or to soothe every instance of financial instability, nor is it within its power to do so,” Lacker said. “Central banks garner too much praise when times are good and too much blame when times are bad. It is within the Fed’s power to control the long-run path of the price level, and this remains true even in a world with interest on reserves and large bank reserve account balances.”Still, Lacker acknowledged the Fed does have a role to play when it comes to long-term economic growth.“Economies thrive best in an environment of basic monetary stability,” he said. “In my view, the most important contribution central bankers can make to economic growth is low and stable inflation.”center_img February 24, 2016 647 Views in Daily Dose, Government, Headlines, Newslast_img

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