Consumers, investors, and the market itself are all tuned into inflation's increasingly apparent presence in 2024, drawing even more attention on when the Federal Reserve will finally pivot and start cutting interest rates.

Former Federal Reserve Bank of Richmond President Jeffrey Lacker sits down with Yahoo Finance to talk about why he thinks the Fed is "a bit over their skis" and if inflation persists, it's possible that officials may not issue "any rate cuts in this year at all."

"Policy needs to be restrictive enough. The key with monetary policy is always in a situation like this, is encouraging people to delay spending because it's the excess of spending over the economy's capacity that drives inflation," Lacker, currently the Senior Affiliated Scholar at the Mercatus Center, says. "You don't need to reduce spending so much as to cause a recession, but you do need to restrain it enough. The signs are there's a good chance that Fed policy isn't terribly restrictive right now, and isn't going to do the trick in getting inflation down."

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This post was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: Jeff, thank you so much for being with us. So everybody's trying to figure out what the Fed is going to do. I'm quite sure the Fed included, is trying to figure out what they want to do. Rick Rieder of BlackRock earlier said to us, the Fed wants to be able to cut here. And probably cut a couple of times. Do you agree with that assessment? And I guess, will they then be able to cut a couple of times given the recent data?

JEFFREY LACKER: I agree that they do seem to be anxious to get started on cutting rates. It looks like they're positioning to do so at the first time. It's credible for them to do so. But I think they're out a little bit over their skis. And I think they've got-- they went a little too far last year and encouraging views about rate cuts this year. And I think this recent stretch of inflation data over the last three months is a good reason why they would have stood themselves in better if they'd been a little more cautious last year.

It is quite plausible that inflation sticks right around here. This would be 3% to 4%. 3.5 to 4 on the CPI. Maybe three and 1/2 on the PCE core. And if it just persists at this level, they could easily not get any rate cuts in this year at all.

JOSH LIPTON: What needs to happen Jeffrey to get inflation back to target? Does unemployment have to ramp? Is that what needs to happen?

JEFFREY LACKER: No, it doesn't. But policy needs to be restrictive enough. The key with monetary policy is always in a situation like this. Is getting-- is encouraging people to delay spending because it's the excess of spending over the economy's capacity that drives inflation. You don't need to reduce spending so much as to cause a recession. But you do need to restrain it enough.

And the signs are that there's a good chance that Fed policy isn't terribly restrictive right now. And isn't going to do the trick in getting inflation down. The way to think of this is that there's a real interest rate, that's relevant to people's incentives to delay spending. And what's relevant to that, what goes into that calculation is the current inflation rate. Not what the inflation rate is going to be at the end the SCP in the long run when inflation is back down to 2%.

With inflation running around 3.5% right now, I think there's a good case to be made that policy is not terribly tight right now.

JULIE HYMAN: Well, even if policy isn't terribly tight right now, I guess there's also always the perennial question of how effective it would be even if it were tighter. In other words, the things that we're still seeing increase in price are maybe things that aren't as affected by rate policy, if you're talking about things like medical costs or health care spending for example.

JEFFREY LACKER: Well, there's always some components of the basket of goods that consumers and businesses purchase that go up more rapidly than others. So there's always relative price changes. But you want the overall level of prices. The average. The value of money over time to be stable. And sure, driving up real interest rates might not cut into what people spend on health care. And might not diminish the sense, the extent to which medical prices are exceeding inflation.

But there's going to be something that people cut back on and firms cut back on. And so yeah, something will give and the overall inflation rate will fall.