Former Richmond Fed Pres. Lacker: The Fed should provide guidance that's more 'two-sided'

Core Viewpoint - The discussion centers around the Federal Reserve's interest rate policy, particularly in light of current economic conditions and inflation dynamics. Group 1: Economic Conditions and Fed Policy - The Federal Open Market Committee (FOMC) has been overly optimistic about disinflation for the past year and a half, leading to a more accommodative policy than necessary [3][5] - A surge in productivity could lead to increased spending today, putting pressure on economic resources, which may necessitate raising real interest rates to balance spending with current resources [4][5] - The administration's view that inflation is primarily driven by temporary tariff surges is challenged, as such counterfactual reasoning does not accurately predict inflation trends [6][7] Group 2: Labor Market Dynamics - A weak labor market does not provide a solid basis for inflation transmission, but the slow growth in both supply and demand for labor can still exert upward pressure on costs [9][11] - Historical lessons indicate that inflationary pressures can arise even when unemployment is at various levels, emphasizing that the unemployment rate alone does not safeguard against inflation [12] Group 3: Future Rate Guidance - While the Fed has cut rates recently, there is a need for more balanced guidance regarding future rate changes, especially if inflation does not decrease as anticipated [14][15] - The notion that the Fed raises rates only during strong growth is misleading; the Fed focuses on growth relative to potential output, which can fluctuate based on economic shocks [16][17][19]