Fed President Lacker Sees Positive Trends in 2009

Virginia Federal Reserve Bank President Jeffrey Lacker has a rather positive outlook for 2009, which is actually shared by other economists. If Lacker is right about his forecast for the economy in 2009, it will be cause to celebrate.

Fed banker Jeffrey Lacker gave a speech to the Tech Council in November, in which he expressed guarded optimism for the domestic economy.  He thinks that it's reasonable to expect the economy to regain traction in 2009.

"It's essential that we not let inflation drift from view," Lacker said, according to published media reports. "It may seem premature to be worrying about how inflation behaves after the recession is over, but we need to be sure our policy remains consistent with a strategy that does not allow inflation to ratchet up over the business cycle."

Lacker stepping up

Lacker happens to be one of the Federal Reserve's most outspoken members when it comes to fighting inflation, and he'll be one of the influential members of the Fed board that votes on interest rate policy in 2009. While some expect to see the Fed cut rates even more, they acknowledge that the central bank has very little room left to lower interest rates, because they're already closing in on rock bottom. The Fed often slashes rates to fight recession.  But lowering rates can undercut the value of the dollar and make money so plentiful that it triggers inflation. Right now, most economists are more worried about deflation, and officials, including Lacker, have an immense burden of responsibility. If they make the right moves, they could save us from further economic deterioration in 2009, and possibly help the economy get back to a healthy condition. But if they make even one mistake, it could have immediate and profound negative implications for the future economic forecast.

Cutting rates

The Fed has cut rates by an enormous 4.25 percentage points since September of last year.  It's expected to cut them again by as much as half a point when the central bank voters convene in mid-December. If they do cut rates by that much, Fed rates will only be half a point away from zero.  At that point, cutting rates will no longer be an option. Without the ability to cut rates, the Fed loses one of the most powerful-perhaps the most powerful-tool in its toolbox for fixing the economy.

Positive 2009 forecast

Lacker offers hope, though.  He argues that so far, monetary policy has done plenty to stimulate the economy, and those measures may reap good results that could help turn the economy around and begin a rebound in 2009. During his November speech, he said that the major fallout from the economic crisis has subsided already or is in the process of doing so.  Americans can only hope that his forecast is right on the money.