Fed’s Lacker Says “Strong Case For Rate Hike… August Jobs Data Won’t Change Decision”

With just 20 minutes to go until the latest most important jobs report ever in the history of man, Richmond Fed Chief Lacker just explained why “the case for raising rates is still strong”…

But perhaps most crucially, Lacker explains “recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy,” removing the one last leg for permabulls to rely on (that is if you velieve The Fed is not Dow-Data-Dependent).

While “there is always a chance that this morning’s report is unexpectedly weak,” Lacker said, refering to the Labor Department’s release of non-farm payrolls at 8:30 a.m. ET, but “it’s quite unlikely that a one-month blip would materially alter the labor market picture or, for that matter, the monetary policy outlook.”

Full Speech below:

Highlights:

Good morning, and thank you for inviting me to speak with you. I think it’s fair to say that the subject of my remarks today, the Federal Reserve’s interest rate policy, has received relatively prominent media attention in recent months. But the current setting of the Fed’s policy rate dates back to the end of 2008, when the financial turmoil was worsening and the recession was deepening. That’s when the Federal Open Market Committee (FOMC) set a target range for the federal funds rate of between zero and 25 basis points. With short-term interest rates reduced to near zero and inflation of at least 1 percent since then, real, inflation-adjusted interest rates have been negative for the better part of six years.

Following other recent recessions, the Fed has typically raised interest rates within a few quarters of the end of the contraction in economic activity.¹ In contrast, the Great Recession ended in the second quarter of 2009, and while many initially expected rates to rise again within a couple of years, we are now entering the seventh year of what seems like an epic waiting game.

The title of my talk today is “The Case Against Further Delay.” As that title suggests, I plan to review the main reasons to begin raising rates sooner rather than later. As you may know, the FOMC is scheduled to meet the week after next, and I expect the Committee to consider fully both the arguments for and against further delay. Earlier this year I said publicly that I thought the case for raising rates was strong, and I still think that’s true. But I should emphasize that I will not make a final decision on the question until I have had the benefit of discussions with my colleagues at the upcoming meeting and have reviewed the additional data we will receive between now and then. I should also emphasize that, as always, I am speaking for myself and the views expressed are not the official views of the FOMC.²

Consumer Spending Has Accelerated

In my view, the most significant facts supporting an interest rate increase are related to household expenditures. As I’m sure a room full of retailers is well aware, consumer spending plays a major role in our economy, constituting more than two-thirds of our nation’s GDP. Following the end of the recession, growth in real personal consumption expenditures was relatively slow as households repaired their balance sheets while coping with weak labor markets. After an initial post-recession rebound, consumer spending growth averaged less than 2 percent at an annual rate for several years. In 2014, however, household spending accelerated, averaging over 3 percent for the year, only to fall back to a slower pace early this year. But that first quarter slowdown now seems largely attributable to temporary factors, such as unusually severe winter weather in many areas of the country. Spending growth has picked up again since then, growing at a 3.1 percent annual rate over the last three months.

Household spending growth is fueled by household income growth, both current and anticipated, and real income has registered significant gains since the end of the recession, driven in part by steady employment growth since 2011. I’ll have more to say about jobs in a few minutes, but let me just say now that I believe improvements in the labor market are likely to continue to fuel healthy growth in consumer spending at between 2 ½ and 3 percent per year.

What is the link between consumer spending growth and monetary policy? As I noted at the outset, with the federal funds rate near zero and inflation running between 1 percent and 2 percent, real short-term interest rates — that is, inflation-adjusted interest rates — have been negative for most of the past six years. Conceptually, the real interest rate is the price at which people can exchange purchasing power today for purchasing power in the future. This price should depend of the relative supply of and demand for goods today and goods in the future. In general, this suggests a connection between real interest rates and the expected growth of consumption of goods and services: Higher growth should be associated with higher real rates. While this connection isn’t always tight in the data, the logic strongly suggests that a negative real interest rate is unlikely to be appropriate for an economy with persistent consumption growth at the rate we are now seeing.