Jeffrey Lacker on Fed Governance and Learning from the Recent Inflation Surge

Episode Summary

Executive Summary: Jeffrey Lacker argued the Fed’s governance should preserve regional bank independence and robust deliberation, but Congress needs stronger oversight. He was highly critical of the 2020 framework and the Fed’s delayed response to the 2021 inflation surge, saying the episode showed the dangers of overemphasizing maximum employment, underweighting preemption, and mistaking supply shocks for transitory inflation amid rapid nominal demand growth.

Main Topics: Fed governance and regional bank role (Priority: 5/5): Lacker defended the value of Reserve Bank presidents, their independent research staffs, and their contributions to robust FOMC debate, while favoring more presidents voting rather than fewer regional banks or silencing non-voters. Congressional oversight and accountability (Priority: 5/5): He strongly supported proposals for more transparent congressional oversight, including GAO reviews, a more independent IG, and mechanisms analogous to post-WWII oversight of intelligence agencies. Critique of radical governance reforms (Priority: 4/5): He rejected or criticized ideas such as nationalizing reserve banks, observer-only status for non-voting presidents, and sharply reducing districts, arguing they weaken useful federalism and operational capacity. Why the Fed missed the 2021 inflation surge (Priority: 5/5): Lacker said the 2020 framework, especially its asymmetry toward employment and tolerance for above-target inflation, reduced the Fed’s willingness to preempt inflation and contributed to policy delay. Rethinking maximum employment (Priority: 5/5): He argued the Fed misunderstands maximum employment as a fixed or near-fixed labor-market endpoint, when it is better seen as a shifting, shock-dependent concept that should not dominate policy. Lessons for the framework review (Priority: 4/5): He urged clearer communication, explicit consideration of alternative inflation scenarios, greater willingness to admit mistakes, and a more candid after-action review culture similar to the military.

Key Arguments: Reserve Bank presidents add value because their independent staffs create a red-team/blue-team dynamic that improves FOMC deliberation. Nationalizing reserve banks would not meaningfully change profit incentives, since the current dividend structure already makes them effectively public financially. Congress, not state governors, should be the primary source of accountability for the Federal Reserve system because the Fed is created by Congress. Reducing the number of Reserve Banks from 12 to 5 would weaken the system’s operational capacity and ignore the many non-monetary functions of the banks. Keeping non-voting presidents silent would be counterproductive because the FOMC benefits from broad participation in long, substantive meetings. Higher governor pay could help attract and retain stronger candidates, but tenure issues also depend on chair culture and openness to dissent. The 2020 framework’s emphasis on making up for inflation undershoots and linking policy to maximum employment diminished the Fed’s willingness to react to rising inflation. Preemption remains important; the Fed should explicitly allow responses to incipient inflation pressures rather than ruling them out. The Fed should not overread maximum employment as a fixed unemployment rate; it is a moving concept influenced by shocks and adjustment dynamics. The Fed erred by treating inflation as mainly transitory supply-side noise when nominal demand had surged sharply in 2021. A good framework review should include candid retrospection, alternative scenarios, and explicit acknowledgment of mistakes, not just hindsight narratives.

Data Points: Fed employment of Jeffrey Lacker: 28 years - Lacker described his long experience inside the Federal Reserve System. Richmond Fed presidency: 2004-2017 - His tenure as president of the Federal Reserve Bank of Richmond. Richmond Fed employment: 1989-2017 - Total period he worked at the Richmond Fed. Reserve Bank research staff size: 20 to 90 PhD economists - Lacker cited the size range of research staffs at Reserve Banks. FOMC meeting length: Eight times a year / over two days / about eight hours - He described the duration and frequency of FOMC deliberations. Governor tenure: About two years on average - He noted governors often leave far before their 14-year terms end. Governor pay: Around $200,000 at most - Compared with Reserve Bank president compensation. Reserve Bank president pay: Around $400,000 average - Used in discussing compensation and retention. Inflation target: 2% - He referenced the Fed’s announced inflation objective and earlier secret adoption. Recent inflation peak: 7% - He cited the inflation surge in 2021/2022 as unprecedented in recent decades. Pre-2020 inflation pattern: Around 2% with fluctuations - He described the long period of price stability before the surge. Framework adoption: August 2020 - The new Fed framework that he criticized. Policy response delay: Until March 2022 - He said the Fed did not begin moving rates until then despite earlier warning signs. Federal Reserve Bank count proposal: 12 to 5 - A proposal he discussed from Bologgio and Ireland. Potential GDP/recession period reference: 2011-2012 - Used repeatedly in discussing max employment and framework design. Federal Reserve target range: 0 to a quarter percent - The federal funds target range in the 2020 guidance he quoted.

Pivotal Quotes: "The Fed would not be the first agency in U.S. history to outpace Congress." — David Beckworth quoting Levin and Skinner: Used to frame the governance discussion and analogy to oversight of intelligence agencies. "I think preemption remains important." — Jeffrey Lacker: Central lesson from the inflation surge and a critique of the 2020 framework’s implied delay. "It just doesn't strike me as a useful thing to do, to take a bunch of people who've thought a lot about the issues and have them just sit on their hands in a really important discussion." — Jeffrey Lacker: His rejection of proposals to make non-voting Reserve Bank presidents merely observers.

Implications: Listeners should expect stronger calls for Fed transparency, congressional review, and a framework that prioritizes early inflation response. The episode suggests the Fed’s next review should be candid, not defensive, and more willing to learn from recent policy mistakes.