Important News on Interest Rates

A few hours ago Jeffrey Lacker, President of Federal Reserve Bank of Richmond made a statement about interest rates and US economic growth. Here is what he had to say:

“Well, to cut to the chase, I don’t know whether we’re going to raise rates in October or not.  I made a decision at the last meeting to dissent, because I thought conditions warranted higher rates then.  I thought the same was true back in June. I was persuaded to hold off, that the timing of the interest rate increase wouldn’t matter plus or minus one or two meetings.  Beyond six to nine months, getting up to six, nine months, that’s another matter entirely. As for the data, so the retail sales report was maybe a notch lower than expectations.  But I don’t think it changes the outlook fundamentally; it doesn’t change the picture for me much.  Consumer spending has been very strong.  We had some very strong retail sales numbers in the spring and the summer.  People are looking at over 3 percent real consumer spending growth for the third quarter, and that’s been consistent with consumer spending having been very strong over the last two years, over 3 percent growth, in contrast to less than 2 percent early in the expansion.  So that, for me is an important data point, and it doesn’t change my outlook that much.”

"The higher sustained growth we've seen in real consumer spending strongly suggests that real interest rates need to be higher than they are now," Mr. Lacker said. "It seems unlikely" the current level of short-term rates "is going to be sustainable with this stretch of consumer spending growth."