By Steven K. Beckner

CHARLOTTE, North Carolina (MNI) – Richmond Federal Reserve Bank
President Jeffrey Lacker warned Monday against “steering monetary policy
off course” by “targeting unemployment” instead of inflation.

Lacker, who is not a voting member of the Fed’s policymaking
Federal Open Market Committee this year or next, minimized the risk of
deflation and said that while inflation is “well contained” now, that
should not be “taken for granted.”

Predicting that the economy will grow somewhat faster next year, he
said this means that firms and households will become less desirous of
holding “precautionary” deposits at banks and more inclined to spend.
This will require the Fed to provide less liquidity to the banking
system if it is to avoid an acceleration of inflation.

Lacker in remarks prepared to the Charlotte Chamber of Commerce,
warned that expanding the Fed’s balance sheet through additional
quantitative easing will necessitate “more rapid balance sheet
reduction” when it comes time to withdraw monetary stimulus.

Commenting on the FOMC’s Nov. 3 decision to buy $600 billion in
longer term Treasury securities by the end of the second quarter of next
year, Lacker said this “provision of further monetary stimulus at this
point in the business cycle is not without risks.”

“Historical experience, including the inception of the Great
Inflation of the 1970s, suggests that central banks should be careful
not to steer monetary policy off-course by targeting the unemployment
rate,” he said in an apparent referenced to the heavy emphasis which Fed
Chairman Ben Bernanke and other Fed policymakers have been placing on
the need to bring down near double digit unemployment in recent weeks.

“Moreover, if growth picks up next year, as I and many other FOMC
participants expect, the precautionary demand for liquidity by
households, firms and banks will diminish,” Lacker said. “At some point
we will need to respond by reducing the provision of liquidity to the
banking system to prevent inflation from accelerating, as it often can
when a recovery picks up steam.”

“Further balance sheet expansion now could require more rapid
balance sheet reduction later on, complicating the withdrawal of
monetary stimulus when it becomes necessary to maintain price
stability,” he continued.

“It is appropriate, therefore, that the FOMC has committed to
‘regularly review the pace of its securities purchases and the overall
size of the asset-purchase program in light of incoming information and
will adjust the program as needed,'” he added, quoting the FOMC’s
so-called “QE2″ announcement.

Although Lacker won’t be voting next year, at least two officials
who will be share his concerns.

Prefacing his monetary policy comments, Lacker said the economy is
now “in something of a soft patch” with real GDP grosing at a
“below-trend” 2.5% in the third quarter.

He doubted housing will “contribute significantly to growth over
the next two years” and also pointed to “anemic” non-residential
investment, sluggish consumer spending and an “extremely weak labor
market.”

He said “it will take sustained, above-trend GDP growth for
unemployment to decline meaningfully.”

But he sounded more upbeat than Bernanke and others about the
prospects for employment and in turn aggregate demand and economic
growth.

“Fortunately, we are beginning to see some indications of better
labor market conditions, last Friday’s disappointing employment report
notwithstanding,” he said. “For example, over the last five months the
number of private-sector jobs has risen by 116,000 per month. The
average workweek has registered gains, and average hourly earnings have
grown a bit faster than inflation. These all point to rising incomes,
which are likely to bolster further growth in consumer spending.”

Lacker said “unusually widespread uncertainty regarding government
policies” has contributed to economic sluggishness and said he has been
hearing ” forceful and impassioned complaints from many contacts in our
District about the dampening effect of policy changes that are in
store.”

However, he said those uncertainties will likely diminish next
year.

And he said he expects GDP to grow “a bit higher” than the 3%
consensus among professional forecasters.

“I am encouraged by recent signs that some of our leaders seem
willing to meaningfully address the looming federal fiscal imbalance,”
he said. “Also, in the last few months we’ve seen an improved rate of
expansion in consumer spending; suggesting that household spending will
grow more rapidly in coming months as confidence regarding income
prospects gradually improves. As a result, I expect private sector
demand to pick up steam in the year ahead.”

Lacker said “deflation is clearly even less of a risk than it was a
few months ago.”

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]