–Shifting Expectation For First Rate Hike To Late 2013 From Mid-2013
–Still Does Not See Need For Additional Monetary Stimulus

WASHINGTON (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker Monday described U.S. second quarter economic data as “pretty
tepid,” and said the economy is definitely experiencing a slowdown.

“I tend to think some of the slowdown’s real, I think that a cloud
hanging over Europe is having an effect on export demand, manufacturing
demand and that’s percolating through the economy slowly,” he said in an
interview on Bloomberg Radio.

However, “I don’t think this is fatal, I don’t think this is
tipping us into a recession right now,” he added.

Rather the U.S. economy is in a situation where growth will likely
fluctuate between “somewhat satisfactory and disappointing,” Lacker
said.

Still, Lacker — a voter on the Federal Open Market Committee this
year — does not believe additional monetary stimulus is warranted.

“Things like the [Operation] Twist or QE are unlikely to have a
substantial effect,” he said, and if they do, “it’s more likely to be on
inflation than growth.”

The FOMC has said current economic conditions will require interest
rates remaining at historically low levels until late 2014. Lacker
warned, however, that this statement should not be taken as a pledge and
that the central bank could hike sooner or later depending on incoming
data.

Lacker also said he has revised his forecast for the first increase
of the fed funds rate from mid-2013 — back in January — to an
expectation of late 2013 now.

It is also “likely true” that other members of the FOMC are also
pushing back their forecasts, he said.

Lacker warned that the still high unemployment rate will not be the
“primary determinant” of when the Fed begins to raise rates.

“If we have sustained growth at 3% or more, and it looks it would
be continued, I think we’d need to start raising rates,” he said. “And
that could happen even before the unemployment rate falls
substantially.”

Lacker argued that the U.S. economy is “pretty close” to maximum
employment right now and he does not think there is much more monetary
policy could do.

Additional asset purchases by the Fed would just further complicate
its exit strategy, he said.

Lacker’s fellow voter on the FOMC, San Francisco Fed chief John
Williams, warned in a speech in Idaho Monday that Europe remains the
main wild card for the U.S., and that a severe enough spillover could
have dire consequences for the domestic financial system.

Lacker, however, said the financial contagion is would be minimal
and any spillover more likely to be seen in short-term commercial paper
markets and impact money market mutual funds “substantially.”

Despite his warnings, Lacker said inflation in the U.S. is in “a
good place right now,” and inflation expectations have been “awfully”
stable.

“I don’t see an imminent break out of inflation on the horizon on
the upside,” he said.

** MNI Washington Bureau: 202-371-2121 **

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