–Still, Anticipates ‘Earnest’ Re-Evaluation In The Months Ahead

By Brai Odion-Esene

RICHMOND (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker said Friday that while conditions in the U.S. economy might not
have improved to the point that Fed officials could consider making
changes to its $600 billion plan to buy longer-term government debt, he
expects the program to undergo “earnest re-evaluation” in the coming
months.

In remarks prepared for the Richmond Chapter of the Risk Management
Association, Lacker repeated his belief that the provision of further
monetary stimulus at this point is not without risks, and the challenge
for the Federal Open Market Committee will be “determining the time and
manner by which policy returns to a more normal mode of behavior.”

As for the future of the Fed’s large scale asset purchase program,
Lacker noted that “while the outlook may not have improved enough just
yet to warrant adjust our purchase plans in the near term, I anticipate
earnest re-evaluation as economic developments unfold in the months
ahead.”

The re-evaluation process will be challenging, Lacker continued,
warning that the level of economic activity — relative to levels prior
to the downturn — “may distract from the need to raise real interest
rates as the rate of growth improves.”

Inspite of his belief that economic outlook is not yet at a point
that would warrant scaling down or ending asset buys, Lacker did have a
bullish view on the path that the economy will take in 2011.

“I expect stronger growth in overall activity this year than last,”
he told the audience, predicting GDP to come in somewhere between 3.5%
and 4%.

He also described the outlook for inflation as benign, adding that
the risk of deflation “is negligible.”

Lacker does warn, however, that recent increases in energy prices
will show up in consumer price measures for the next few months,
“pushing overall inflation numbers up somewhat.”

Within the U.S. economy, Lacker said consumer spending is beginning
to show “some signs of real life.” And given that the labor markets have
been firming gradually, he added, “it’s not a stretch to project robust
growth in consumer spending this year.”

His bullish outlook extended to the business side, with Lacker
stating his expectation that business investment “is likely to add
significantly to growth this year.” As a basis for this assessment, he
pointed to the “extremely low” cost of capital for most of corporate
America, and the rise is business lending by banks in the fourth
quarter.

Export growth also has encouraging prospects, Lacker said, and he
expects demand for U.S. exports “to be quite firm this year as well.”

While “considerable difficulties” such as the housing market still
remain, Lacker noted that there have been small increases in residential
construction spending in each of the last three months. “(S)o I would
not be surprised if the worst was behind us in the housing market,” he
said.

He also repeated his opposition to government support and
guarantees of housing debt, arguing that it is housing equity and not
leverage that should be subsidized.

On the fiscal front, Lacker spoke of the long-term “serious
mismatch” that exists between the trajectories of spending and taxes. He
declared that there is no uncertainty about whether the long-term
federal budget imbalance will be corrected.

He added that projections of a widening budget deficit, such as
those published by the Congressional Budget Office, “are simply not
feasible and will not happen.”

The isssue, Lacker said, is how a sustainable fiscal path will be
achieved. “We would be wise to heed the abundant empirical evidence of
the superiority of taking action before a crisis is upon us.”

** Market News International **

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