–Must Be Prepared to Withdraw Stimulus Before Reach Full Employment
–See Low Rates Appropriate Only Through Mid-2013, Not Late 2014

WASHINGTON (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker warned Friday of the risk of overestimating the extent to which
economic slack and high unemployment will contain inflation pressures,
and said policymakers must be ready to withdraw stimulus even before the
economy reaches full employment.

Repeating his dissent on the Fed’s policy-setting Federal Open
Market Committee, and his view accommodation will have to be withdrawn
by mid-2013 rather than late 2014, Lacker displayed a stark difference
from Fed Chair Ben Bernanke who has repeatedly stressed that reversing
course too soon could endanger the recovery.

In an interview with CNBC from the Richmond Fed’s banking
conference in Charlotte, Lacker, who is an FOMC voter, said he is
optimistic about the state of the economy and the current outlook for
inflation.

“I’m reasonably hopeful we’re going to get good growth this year,”
Lacker said, repeating his forecast for 2%-3% growth for 2012 “and
rising next year. It could get to 3% next year.”

Lacker said, “The job market seems to be gradually healing.
Business investment still seems to have a lot of momentum to it.”

Meanwhile, inflation currently is not a problem: “We’re in
reasonably good shape right now. I’m expecting inflation to be around 2%
in the next year or two,” which is the new official FOMC target.

While energy prices going to push that higher next month or two, he
expects the geopolitical concerns around the global oil market to last
only a quarter or two.

But Lacker warned that “Inflation pressures can arise even if
unemployment above 6% or 7%.

“I think in the past I’ve seen people overestimate the extent to
which slack is going to depress inflation … and we’ve plenty of
experiences of inflation pressures arising despite reasonably elevated
unemployment rates,” he said.

And while Lacker agreed “you have to be cautious” about the job
gains in the last few months, since they could prove temporary, “I’ve
been heartened by the recent numbers. …

“I think there is room for optimism,” he said, and there is “a
good chance of getting below 8% (unemployment) by 2013.”

What that means for policy is that “We need to be prepared for the
possibility that we need to start raising rates, withdrawing monetary
stimulus … before unemployment had gotten down to a place where we can
call it full employment,” Lacker said.

And while he acknowledged that “Further easing moves are something
that are part of the arsenal, part of the toolkit and there are
conditions one could conceive of under which you would pull them out and
enact them,” he stressed, “I think we’re very far from that right now.

“If we get growth about what I’m expecting … I don’t see where
the rationale for further easing is going to come from,” Lacker said.

He repeated his rationale for dissenting on the language in the
FOMC statement saying rates are likely to remain low through late 2014.

“I just disagree. My estimate is that economic conditions are
likely to warrant low rates until sometime in the middle of next year.
… That’s not a promise and neither is the committee statement. It’s a
forecast.”

Refuting the concern — which Bernanke has expressed repeatedly —
that tightening policy could derail the recovery, Lacker said, “If
higher rates come about it will because of a stronger recovery. It won’t
be an obstacle to it.”

“I thought the January meeting would be a great time to step away
from keeping that calendar date in the language,” and instead rely on
the members’ projections which give very rich view. “I thought that was
the way we ought to communicate how long to keep interest rates low.

“If it’s not a commitment, if it’s a forecast, well then it ought
to vary as the outlook varies, which means it could move like a
trombone.”

Asked about the frothy optimism in financial markets due to their
belief in the possibility of another round of quantitative easing, as
commentator Joe Kernen said traders are “like drug addicts” in regards
to any Fed statement, Lacker responded sardonically: “I can’t comment on
drug use on Wall Street.”

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

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