President-elect Donald Trump has called for 4 percent economic growth in the U.S., but the president of the Federal Reserve Bank of Richmond is not convinced that goal can be achieved anytime soon.
Jeffrey Lacker, in a recent interview with the Observer, said gains in the nation’s workforce and its productivity have not been strong enough to generate Trump’s proposed economic growth rate.
“While 4 percent is theoretically attainable, a lot of things would have to fall into line to get us there, and they don’t look highly probable to me at this point,” said Lacker, 61, who holds a doctorate in economics from the University of Wisconsin and has led the Richmond Fed since 2004.
Trump was among topics discussed in the wide-ranging interview at the Richmond Fed’s Charlotte branch, which takes up a city block across from the Spectrum Center. The Richmond Fed has two branches (the other is in Baltimore) and its footprint covers Maryland, Virginia, the Carolinas, most of West Virginia and Washington, D.C.
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Under the Fed’s rotating schedule, Lacker will become a voting member of the central bank’s 12-person body that sets interest rates in 2018.
The Federal Reserve found itself under attack during the recent presidential race. Then-candidate Trump bashed the Fed, accusing Chairwoman Janet Yellen of playing politics by keeping interest rates low and the central bank of “not even close to being independent.”
Asked what relationship he thinks Trump will have with the Fed, Lacker declined to speculate, noting Trump hasn’t taken office: “The relationship he forms with the Federal Reserve is something we’ve yet to see.”
Questions and answers have been edited for brevity and clarity.
Q. What’s your outlook for Charlotte’s and the nation’s economy in 2017?
A. I’m looking for continued growth at about the 2 percent average rate we’ve seen over the last six, seven years since the recession ended.
I think Charlotte looks like it’s going to track that pretty closely. It has a lot going for it. There’s a pretty vibrant labor market here. There’s a good workforce. It should be able to attract capital and new jobs in a good measure going forward.
Q. Are we due for another recession soon?
A. We don’t see signs of a recession on the horizon. People think of expansions as getting to old age. But the statistical facts are that the probability of entering a recession doesn’t increase with the age of the expansion. The current expansion is notable for its robust job growth. What’s been disappointing about this expansion has been the rate of growth of productivity, because that translates into the rate of growth of real inflation-adjusted incomes for American workers.
Q. What would it take to achieve the 4 percent growth Trump has proposed?
A. We’re growing about 2 percent now. We’ve achieved 4 percent in our past. We’ve achieved 4 percent growth for like a quarter or two. But on a sustained basis, over five years or more, the last time we did that was in the 1960s.
To achieve that, you would need one or both of two things to happen. You would need a very significant increase in the rate of growth of productivity. We’ve been experiencing relatively low productivity growth – 1 percent or less. It seems quite improbable that an increase in the productivity growth rate would be enough to raise growth to 4 percent. The other factor that contributed to strong growth in the 1960s was growth in our workforce. And there we were benefiting from a couple of things: Baby Boomers entering the workforce, the entry of women into the workforce. Both of those are gone now. And the growth of the working-age population is much less than it was in the 1960s. Ironically, the one thing we could do to raise the growth in the workforce in the near term is immigration.
Q. Trump has talked about rolling back financial sector regulations. What are the odds of that happening?
A. I do think there’s a reasonably decent chance of some legislation in Congress, at least that’s the way the legislative outlook is lining up. It appears to be a priority for enough people. Maybe not the first thing out of the block in 2017. But over the next two years it wouldn’t surprise me to see legislation. How far that goes in rolling anything back, I don’t know. I hope it’s constructive and acts to refine the improvements that have been made in the legal environment around banking in the U.S.
Q. You’ve advocated for the Fed to raise rates at a faster pace than it has been. Why?
A. I argued earlier in the year and then later this year that we were allowing a gap to open up between the federal funds rate and our benchmarks for where the rate ought to be given employment, given inflation. That gap’s pretty substantial, and I think we need to move to close it.
Q. Do you think the Fed will raise rates at a faster pace in the coming years?
A. That’s a good question. I think we’ve been over the last two years wrestling with how to start raising interest rates. This past year a number of risks emerged that caused us to delay acting. Those risks have dissipated in Brexit (the U.K. vote to leave the European Union) and then the first quarter there was turmoil regarding speculation about Chinese policy. Growth was definitely stronger in the second half of this year than the first half. The inflation picture is firming. I think all those things are pointing to more rapid, less gradual pace of increases next year.
Q. Some U.S. lawmakers would like the Fed to adopt a mathematical rule for setting rates. Would you support that?
A. Some of the legislation I’ve seen that would require us to submit an algebraic formula from time to time seems to me unrealistic and doesn’t really take into account the way in which we do use and consult rules in the formulation of monetary policy. I don’t think it makes sense to tie policy to one given rule.
There’s probably some things we could do to be more transparent about the role that rules play in our monetary policy decision-making process. I think it would be useful for us at the Fed to explore ways to be more transparent about that.
Q. Wells Fargo has been in the news for allegations of unauthorized accounts. How widespread do you think bad sales practices are in banking?
A. My understanding is that there’s some work under way among all the bank regulatory agencies to look across the industry and drill down on that. We don’t have the results of that yet. My guess is that if it was super-pervasive, we would have heard more by now. I think the jury’s out on how widespread it is.