Inflation is the biggest problem facing the U.S. economy, though plenty of other concerns – like the possibility of a recession – are also legitimate, the president of the Federal Reserve Bank of Richmond said Tuesday.
Jeffrey Lacker, who heads the Fed district that covers Charlotte, said that unsustainable inflation rates would “be more costly for us to deal with than the prospects of a slowdown.” The Fed has been cutting the federal funds rate, which is the rate at which banks lend money to each other overnight, since September. That's meant to stimulate the economy, but it can also lead to inflation.
Lacker, who spoke to reporters at the Fed's Charlotte branch, said the country will probably “skirt the boundaries of a recession.” He expressed concern about deterioration in commercial construction, and the “disappointing” effect of the government's economic stimulus package on consumer spending. Lacker also said it is impossible to predict when the housing market might bottom out.
Even so, Lacker said that financial markets have absorbed the fallout of subprime mortgages “surprisingly well,” and he gave Charlotte's economy a relatively clean bill of health.
Q&A with Jeffrey Lacker
Excerpts from his session with reporters have been edited for clarity and length:
Q. How does Charlotte's economy compare with the rest of the country?
Charlotte has a vibrant and pretty well-diversified economy – very strong employment growth over the last several years. It did not experience the run-up in housing prices that other parts of the country, like California and Florida, experienced. There's a little bit less distress here.
Manufacturing in this area seems to be more diverse and export-oriented than some parts of the country, like the Midwest. The financial services industry has experienced strong growth over the past decade or so. I think Charlotte's really been better than the country on average.
Q. Why didn't we have a huge run-up in housing prices?
It has to do with these fine details about land use. In Maryland, around D.C., it's really hard to go through the zoning process to bring a big parcel of land to market as buildable lots.
With that supply of buildable lots kind of rigid, that increase in demand for housing near the city drives up prices.
In contrast, here there seem to be less impediments on the elastic supply of land to build on.
Q. How important are Bank of America and Wachovia to Charlotte? What would happen if they weren't here?
Charlotte's really reached the point where what they have is a financial services industry that's bigger than just those two companies. There are financial services businesses that locate here kind of like an IT business (locating) in Silicon Valley.
There are a lot of good financial services professionals in town here, there's an active labor market with the right skills. … I see it as having reached a sustainable growth pattern. It could probably survive.
Q. Have you talked to Bob Steel (the new chief executive of Wachovia)?
Yes, I have a couple of weeks ago.
Q. What did you talk about?
We generally don't comment on (that).
Q. Do you think the worst is over in terms of credit losses for banks?
No, I think there's some substantial uncertainty about the ultimate size of mortgage losses. With any package of mortgages, it takes four or five years for the ultimate loss rate to be realized, and we're still pretty early on with the (most problematic) mortgages made in 2006 and early 2007.