Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank isn’t close to trimming its $3.47 trillion balance sheet and he forecast “a couple more years of sluggish growth.”
“This asset-purchase tapering is just slowing the rate at which we’re increasing the balance sheet,” Lacker, who doesn’t vote on the Federal Open Market Committee this year, said yesterday in a Bloomberg Television interview with Peter Cook. “We’re not anywhere near decreasing the balance sheet yet.”
Lacker, who dissented in September 2012 against the announcement of a third round of bond purchases by the Fed, said he would be “fine with us tapering it off right now.”
Policy makers are considering when to end the biggest stimulus program in the Fed’s 100-year history after pushing central-bank assets to a record level. Chairman Ben S. Bernanke said June 19 the Fed may trim its $85 billion in monthly bond buying this year and end it around mid-2014 if the economy grows in line with the central bank’s forecast.
Lacker said he expects growth of about 2.25 percent next year. Gross domestic product expanded at a 1.8 percent annualized rate from January through March, down from a prior reading of 2.4 percent, the Commerce Department said yesterday.
“The economy is telling us this is about all we’re capable of right now,” Lacker said. “We’re going to continue to get growth at a fairly disappointing rate going forward.”
The Richmond Fed chief said policy makers probably won’t alter their guidance about trimming purchases based on gross domestic product trends, focusing instead on the job market.
“The data from the labor market’s going to be more determinative for that,” he said. “Labor market improvement is the order of the day right now.”
Minneapolis Fed President Narayana Kocherlakota, who doesn’t vote on monetary policy this year, said yesterday he favors continuing bond purchases until unemployment falls below 7 percent, which he doesn’t expect until the second half of next year. The unemployment rate last month was 7.6 percent.
“I’m expecting the unemployment rate to be hitting 7 percent sometime in the second half of 2014,” Kocherlakota said in an interview on CNBC. He backs a strategy of buying assets “at least until” unemployment is below 7 percent.
Bernanke’s comments last week pushed down stocks and bonds. Since the day before his remarks the Standard & Poor’s 500 Index has fallen about 3 percent, while the yield on the 10-year Treasury note rose to an intra-day high of 2.66 percent from 2.19 percent.
Bernanke “did an excellent job” of describing what policy makers see as likely to happen as conditions unfold and “how scaling back asset purchases is likely to depend on the incoming data,” Lacker said yesterday.
Still, Fed communications have had a “rocky period over the last couple of months” as officials commenting about reducing purchases spurred volatility in markets, Lacker said.
“Markets got a little bit ahead of us in terms of what they were expecting” for the duration of purchases, he said. “They’ve gotten into better alignment now with the committee’s expectations.”
Disinflation has given Fed officials more leeway for easing. The personal consumption expenditures price index rose 0.7 percent for the year through April, below the FOMC’s 2 percent target.
Recent low inflation appears temporary, Lacker said, adding he’s “pretty confident” price increases will accelerate.
“The low inflation numbers have given me pause,” Lacker said. “But I’ll have to say I’m convinced so far that they appear to be transitory. And I say that based on the relative firmness of inflation expectation measures that we have from financial markets and from survey measures.”
Monetary policy isn’t “capable of doing much” about factors restraining growth that are beyond the Fed’s control.
“There are structural factors in the labor market affecting particularly labor force participation,” Lacker said. “That there are impediments to hiring an investment project that are keeping firms from making hiring and investment decisions.”
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