–Chance Of Recession Low Right Now
–Inflation A Little High, But Can Withstand Fluctuation Around 1-2%
–Operation Twist To Raise Inflation Rather Than Foster Growth
–Europe Is A Potential Source Of Shock To the U.S.
By Alyce Andres-Frantz
MADISON, Wisc. (MNI) – Jeffrey Lacker, president of the Federal
Reserve Bank of Richmond, Monday said the recent deterioration in the
U.S. economy has not accelerated but rather the recent stream of
economic data was consistent with moderate growth.
Lacker was a keynote speaker at the University of Wisconsin
Economics Student Association meeting where approximately 150 were in
attendance including students, staff and members of the local business
community.
In a question-and-answer session with the press, Lacker was asked
if the recent deterioration in the U.S. economy was accelerating. “No, I
don’t think so,” Lacker said.
“Broadly speaking, the economic data has been disappointing for the
last three months but (still) consistent with moderate economic growth,”
Lacker said.
Disappointing data included “consumer spending, housing, and
manufacturing has not been growing quite as rapidly as it was a year
ago,” Lacker said.
“The construction data was decent today and factory orders last
week. ISM today went down to neutral,” but Lacker noted that in past
recoveries similar patterns were seen in the ISM data.
Generally “I still think the data is consistent but at a
disappointingly low rate.”
“The chance of recession looks low right now,” Lacker told
reporters.
“Inflation is a little to high right now,” Lacked told reporters.
“But inflation can withstand some fluctuation around our most desired
rate.” However, if inflation were to rise above “where it is now, you
have to be careful about exacerbating the situation.”
Lacker told reporters “I do not see a lot of slack in the economy
right now.” But, he added “inflation is capable of rising despite a
fair amount of slack.”
He noted there are generally various categories of inflation that
rise or fall at any give point, citing the rise in energy costs earlier
in the year. “But core inflation has risen since the begin of year and
that suggests more persistent inflation.”
“My sense is that if Operation Twist has an economic effect, it
will raise inflation,” more so than raise growth. Lacker added that “I
would not have supported it,” if he were a Fed voter.
Lacker told reporters that the “huge scale of unemployment does
not imply that monetary policy can reduce it to 6%, I think that is
something that people do not understand.”
“I think tolerating, even on a temporary basis, higher inflation to
reduce unemployment is something we have tried before and is a dangerous
policy,” Lacker said to the press.
Lacker also told reporters “the rates call is really hard to call
now.”
Lacker admitted there remains the “potential from a shock from a
large economy, but my sense is that Europe is working thorough it.”
While the “situation in Europe remains risky, I think the Europeans
seem to be making progress on the overhang of uncertainty as to how the
risks will be allocated.”
Finally, Lacker told the press that the Fed has become a popular
Federal “debating point and country would be better off it weren’t.”
Lacker explained that the Fed does not have Democratic or Republican
monetary policy but rather “we do monetary policy for the entire
country.”
To the audience, Lacker said, “I am skeptical that
further (monetary policy) stimulus will result in higher (economic)
activity,”
Lacker told the audience that the extension in unemployment
benefits may add as much as 1 point to the overall unemployment rate.
Additionally there are certain regulatory issues such as those from
the Environmental Protection Agency and the Department of Labor could be
adding to unemployment, Lacker told the audience.
Lacker said given the Fed’s growth trajectory laid out since June
2009, a cautious view on the consumer is warranted. “We have not made up
any growth that we lost.”
When questioned by the audience about the Fed’s balance sheet,
Lacker said “Time to exit is when less monetary policy stimulus is
warranted,” and not during a current weak patch.
Lacker told the audience, the Fed will have two ways to withdraw
stimulus either by raising interest on excess reserves or IOER or
selling some securities in its portfolio.
In the minutes of June meeting, “there were principles adopted and
the general philosophy is to use the interest rate as our main monetary
policy instrument. That would suggest putting asset sales on the auto
pilot and use interest rates to vary monetary policy,” Lacker said.
“You might see more action in the pace of rates when the time comes.”
Lacker added that the Fed needs to “play what role they can in
restoring confidence,” but he added that the Fed “is fairly limited in
terms in increasing growth.”
“The crisis has more to do with fiscal policy,” Lacker said adding
that lawmakers role is limited too. “I share a sense of distress and
dismay at the lack of attention to a series of policy issues. We (the
Fed) like you (the general public) are limited.”
“More broadly, because of our role and due to decisions we have had
to make over the past few year, it is good that we are honest,
authoritative, knowledgable and a trusted source of insight and
expertise,” Lacker said of the Fed.
–email: aandres@marketnews.com
** Market News International Chicago Bureau: (708) 784-1849 **
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