Fed's Lacker argues in favour of preemptive action on interest rates

In remarks prepared for a speech on the Economic outlook, the president of the Federal Reserve bank of Richmond, Jeffrey Lacker, said: "While inflation pressures may seem a distant and theoretical concern right now, prudent pre-emptive action can help us avoid the hard-to-predict emergence of a situation that requires more drastic action after the fact.

"The current target range for the federal funds rate, at 25 to 50 basis points, is extremely low relative to the benchmarks I discussed earlier that capture historically successful policy. Careful attention to the lessons of history is likely to be crucial to preserving the important policy gains we have made."

He alluded to the situation rate-setters found themselves in towards the beginning of 1994 to back up his arguments.

Core inflation in January 2014 was running at a relatively low 2.2% year-on-year back then, having drifted down over the preceding three years.

Rather than wait for prices to pick-up, the Federal Open Market Committee started tightening policy in the following month, eventually taking rates higher by 2.5 percentage points over the next nine months.

Those actions, Lacker argued, proved successful, as inflation continued to move lower, falling below 2.0% for the first time ever in November 2015.

It has averaged near 2% ever since.

At one point in his speech, Lacker also specifically said that on the basis of historical relationships then current levels of inflation and unemployment argued for a Fed funds rate of 1.5% or above.

As of 1340 BST the yield on the benchmark 10-year US Treasury note was drifting lower by one basis point to 1.62%.