Bloomberg News

Lacker Says Fed Asset Buying Won’t Speed Growth Above 2%

December 17, 2012

Federal Reserve Bank of Richmond President Jeffrey Lacker predicted the economy will grow 2 percent next year and said the Fed’s stepped up purchases of bonds won’t do much to spur the recovery.

“It’s not clear that monetary policy, by itself, can bring about any material improvement in economic growth,” Lacker said today in a speech in Charlotte, North Carolina. “The supply of bank reserves is already large enough to support the economic recovery, and the benefits of further asset purchases are unlikely to be sizeable.”

Lacker dissented last week from a decision by the Federal Open Market Committee to buy additional bonds and to link an increase in the Fed’s main interest rate to unemployment, saying no single indicator can provide a “complete picture” of the labor market. His prediction of 2 percent growth is less than the central tendency predictions by other policy makers ranging from 2.3 percent to 3 percent for 2013.

“My best guess is that growth will continue into next year at an annual rate of 2 percent and that beyond 2013 we should see growth begin to firm,” Lacker said to the Charlotte Chamber of Commerce’s annual economic outlook conference. “With futures markets forecasting flat or declining energy prices, most economists expect headline inflation to average a little less than 2 percent next year. I agree with that outlook.”

Lacker said he expects “meaningful progress on federal budget issues” and declining risks from the European debt crisis next year. Household confidence will probably improve as well as the job market picks up, and home prices will show “modest” gains, he said.

‘Potential Costs’

“It’s important to recognize the potential costs of additional asset purchases,” Lacker said. “A larger Fed balance sheet will increase the risks associated with the timely and appropriate withdrawing of monetary stimulus by raising interest rates and selling assets.”

The Fed last week said it will buy $45 billion each month of Treasury securities starting in January, expanding its asset- purchase program, and for the first time linked the outlook for its main interest rate to unemployment and inflation.

The central bank said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent, and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.” The Fed dropped its earlier pledge to hold interest rates near zero “at least through mid-2015.”

After Speech

The Richmond Fed president told reporters after his speech he is worried the Fed, after setting the unemployment threshold, will be reluctant to combat rising prices.

“I worry about something like this tying our hands and preventing a preemptive move against inflation,” he said.

Lacker said he forecasts the Fed will next tighten policy in 2014, though “it’s obviously highly contingent on growth and there is lots of uncertainty” on the date.

The Richmond Fed leader also told reporters not to look to the Fed to offset a fiscal tightening.

“Our ability to offset the macroeconomic implications of going off the fiscal cliff are quite limited,” Lacker said, referring to the more than $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. Should lawmakers fail to overcome the budgetary challenge, “I urge you guys not to rivet your attention to the FOMC,” he said.

Index Rose

The Standard & Poor’s 500 Index rose 0.8 percent to 1,425.39 at 3:28 p.m. in New York. The 10-year note yield climbed six basis points, or 0.06 percentage point, to 1.76 percent, according to Bloomberg Bond Trader prices.

The Fed is trying to spur an economy that expanded by 2.7 percent in the third quarter after a 1.3 percent gain in the prior period.

U.S. payrolls climbed by 146,000 in November, above a median forecast that called for an 85,000 gain, a Labor Department report showed. The unemployment rate fell to 7.7 percent, the lowest level since December 2008.

Lacker, 57, has been president of his regional bank since 2004. He was previously the Richmond Fed’s director of research. The Richmond Fed district includes Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.

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

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


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