Bloomberg News

Fed’s Lacker Sees Moderate Growth, Urges No New Stimulus

December 20, 2011

(Updates with Lacker comments in second paragraph.)

Dec. 19 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker predicted the U.S. economy will grow 2 percent to 2.5 percent next year, with inflation likely to meet central bank goals, and urged no additional stimulus.

“I am hard-pressed to see the rationale for any further monetary stimulus” with growth at 2 percent or higher and inflation around 2 percent, Lacker told reporters after a speech today in Charlotte, North Carolina. “Recent economic news in the U.S. has been positive for a couple months now” while prospects in Europe have been “deteriorating,” he said.

Lacker said he was “very comfortable” with the tone of last week’s Federal Open Market Committee statement, which said the economy was expanding moderately despite “apparent slowing in global growth,” while adding that market strains pose “significant downside risks.” Fed Chairman Ben S. Bernanke said Nov. 2 that additional stimulus “remains on the table,” such as buying mortgage bonds or changing the way the Fed communicates its policy goals to the public.

Recent data, including a drop in initial jobless claims to the lowest in three years, have prompted economists to raise their forecasts for the fourth-quarter growth rate. For example, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, on Dec. 16 raised his forecast to 3.5 percent from 3 percent.

Communications Discussion

Asked about communications discussions of the policy committee, Lacker today reiterated his call for an official inflation target.

“Inflation is terribly important as a central bank goal and I think we owe the public a commitment to an announced objective for inflation,” he told reporters. “We have been having a lot of conversations. I can’t speak for the committee.”

A recent cooling in prices “is likely to prove as transitory as did the acceleration we saw earlier in the year,” Lacker said in his speech to the Charlotte Chamber of Commerce economic-outlook conference. “Despite this year’s run-up, I believe the inflation outlook is reasonably good” though “I still view the risks to inflation as tilted to the upside.”

In response to audience questions, Lacker said yields on U.S. Treasury securities have fallen because of a “flight to quality” with greater concerns internationally.

Growth Projection

Lacker said he based his projections for growth on continued gains in jobs, which will aid consumer confidence, and growth at a “less torrid pace” for business investment. Housing will probably remain “relatively dormant” and government spending won’t aid the economy, while export demand is likely to slow because of the slowdown in Europe, he said.

The Richmond Fed president said he overestimated growth this year, which will turn out to be 1.75 percent with about 2.5 percent in the second half, rather than the above 3 percent average for the year he had forecast. He said monetary policy’s ability to raise growth was limited.

“Monetary policy is often credited with entirely too much influence on real growth,” he said. “Monetary policy is about inflation -- that is, the value of money.”

Lacker, 56, votes on monetary policy in 2012 as part of the rotation among Fed bank presidents. He is a former head of research at the Richmond Fed and became president of the bank in August 2004.

Officials Divided

Fed officials have been divided over whether the central bank should wait to see if the economy deteriorates before taking additional steps to try to lower borrowing costs and boost job creation.

Chicago Fed President Charles Evans, who voted against the Federal Open Market Committee’s decision to refrain from further easing, has urged “increasing amounts of policy accommodation.” Dallas Fed President Richard Fisher, who opposed stimulus measures in August and September, said on Dec. 16 the U.S. economy “has slowly begun to strengthen” and said he would opposed additional asset purchases.

The FOMC pledged in August to keep its target interest rate near zero at least until mid-2013, and policy makers agreed on a plan in September to cut borrowing costs by lengthening the maturity of the Fed’s bond portfolio in a program known as Operation Twist. The stimulus measures are aimed at trying to bring down an unemployment rate that’s been stuck above 8 percent for almost three years.

--Editors: Kevin Costelloe, Gail DeGeorge

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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