He’s on the opposite spectrum from Yellen, but inflation has deteriorated to the point where risks are elevated.

Once the fed has figured out it can control the FF/LIBOR with TAF type or repo and ‘market functioning’ somewhat restored, I expect that the imperative to cut rates will be greatly diminished.

Fed’s Lacker: Inflation Picture has Deteriorated

From Richmond Fed President Jeffrey Lacker: Economic Outlook

Since August … the inflation picture has deteriorated. In September and October, the overall PCE price index rose at a 3.3 percent annual rate, and the core index rose at a 2.6 percent rate. Judging by the closely related consumer price index, the numbers for November will be even worse. Now these numbers do display transitory swings, so I wouldn’t extrapolate them forward indefinitely. Still, I have to say that I am uncomfortable with the inflation picture, and disappointed that the improvement we saw earlier this year was not more lasting.

I am also troubled by the lengthy divergence we’ve seen between overall and core inflation. Some of you may recall that core inflation was devised in the 1970s to filter out some of the more volatile consumer prices to get a better read on inflation trends. For several decades, core inflation seemed to work well due to the fact that food and energy prices had no clear trend relative to the overall price level. In the last few years, though, overall inflation has been persistently above core inflation, and few observers expect oil prices to go back below $20 per barrel. Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation. Going forward, markets expect oil prices to back off slightly from their current level, and I hope they are right. If energy prices fail to decline, monetary policy decisions will be that much more difficult in 2008.Lacker isn’t currently a voting member of the FOMC, and last year he voted against holding the Fed Funds rate steady several times: Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.So we need to keep Lacker’s comments in perspective; he is more hawkish on inflation than most of the FOMC members.

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