The Federal Reserve should adopt a strategy of raising interest rates before inflation moves higher like it did in 1994, said Richmond Fed President Jeffrey Lacker on Tuesday.
“While inflation pressures may seem a distant and theoretical concern right now, prudent preemptive action can help us avoid the hard-to-predict emergence of a situation that requires more drastic action after the fact,” Lacker said in a speech in Charleston, West Virginia.
He noted that in early 1994 former Fed Chairman Alan Greenspan decided to raise interest rates even though core inflation was only running at a 2.2% annual rate and had been drifting lower.
The Greenspan Fed hiked rates by 2.5 percentage points over the next nine months.
“This preemptive action was successful and inflation continued to move lower…one could argue that the Fed’s preemptive moves in 1994 laid the foundation for the price stability we’ve enjoyed over the last 20-plus years,” Lacker said.
The Richmond Fed president, who is not a voting member of the Fed’s policy committee this year, has been a consistent advocate for higher interest rates since last summer.
In his speech, he said the Fed was close to its targets of full employment and 2% inflation. As a result, the current target range for the federal funds rates “is extremely low” and should be 1.5% or higher.
Lacker said he expected the economy to rebound after its lackluster 1.1% growth rate in the first half of 2016, led by “solid growth in consumer outlays.” Business investment should also pickup later this year, he said.