But there are also very real skills gaps in selected areas. We don’t know in quantitative terms how much of a drag this is causing, but it is real according to Lacker.
Lacker also believes credit is still constrained, and he points to small-business formation being lower than it used to be. Small businesses used to finance expansion by using their homes to borrow against, but that is harder now, and Lacker links this to this poor productivity (presumably resulting from a lack of investments).
The dot plot contained in the Fed’s Survey of Economic Projections shows a long-run Fed Funds Rate of almost 4%—if the Fed achieves its 2% inflation target. That means the long-term real rate would be 2%, about equal to its historical average. Would Lacker revise down his forecast?
Lacker put in a number for the dot plot that is close to the historical average of near 4%, but he is very open to recent data that suggest we may see a lower real rate over the next 10 to 20 years.
Is the dollar creating tightening for the Fed?
Lacker said the strong U.S. dollar is just one of the things going on and should be expected because the U.S. economy is stronger than other economies, necessitating a rise in real rates in the near term, and that should be expected to generate a rise in the dollar.
The bottom line?
There is a lot of angst and hand-wringing over the U.S. economy. Given the headwinds we have faced, Lacker believes the U.S. is doing remarkably well. Clearly, the U.S. is still one of the best places in the world to implement new ideas and technologies, and fundamentally, he is very optimistic about the U.S. economy.
I greatly appreciated the opportunity to hear the views of this FOMC voting member as the market grapples with improving economic data that may finally begin normalization of the Fed’s interest rate targets.
Read the Conversations with Professor Siegel series here.
1Source: Bloomberg.