By Yali N’Diaye and Heather Scott

CHANTILLY, Va. (MNI) – No doubt the economic recovery has been
disappointing so far, but “the factors that have held back growth this
year — and seem likely to abate — are largely beyond the power of the
central bank to offset,” the Richmond Fed President said Thursday.

Besides, Jeffrey Lacker said in remarks prepared for the Dulles
Regional Chamber of Commerce, “Given current inflation trends,
additional monetary stimulus at this juncture seems likely to raise
inflation to undesirably high levels and do little to spur real growth.”

Presenting a “cautiously optimistic” view of the recovery, Lacker
said he expects inflation to average 2% over the coming year, amid a
gradual recovery that should yield a GDP growth close to 4% over the
next two years.

Still, he did not rule out the possibility of a weaker growth that
could continue at a pace of about 2.75%.

That said, “At present, I do not feel we face significant risk of
growth much below that, or of an outright contraction,” he said.

In fact, at this juncture, the recovery rate is independent from
the Fed monetary policy, lacker said.

And to illustrate his point, he noted that the second round of
quantitative easing that was decided in November 2010 did “little to
spur growth” while raising inflation, a policy objective that is
“clearly” no longer desirable.

Whatever will happen to the recovery going forward, Lacker said,
“is becoming increasingly hard to predict, but the stakes are becoming
increasingly high.”

“While I remain cautiously optimistic that the path of our recovery
will take us back to historical trends, the possibility of persistently
lagging behind our 20th century trend is a pointed reminder that changes
in an array of seemingly microeconomic policies could have macroeconomic
implications that are highly consequential,” he continued.

So far, the recovery has been “decidedly mediocre,” with
unemployment still high and inflation having risen.

Lacker pointed out the depressed housing construction activity and
the weakness in consumer spending as factors holding back growth.

Others, however, are providing some boost, such as business
investment in software and equipment, which is likely to “remain
robust.”

Lacker also cited growth in emerging countries such countries such
as China, India and Brazil, that “should support U.S. export demand for
many years ahead.”

And, “Even the weaker areas of the economy are likely to be less
problematic going forward,” he said, partly blaming the weak consumer
spending on higher retail energy prices, which, however, seem to have
stabilized.

“As long as energy prices do not worsen significantly from here,
consumer spending is likely to regain some momentum in the months
ahead,” he predicted.

He also cited better household balance sheets that should also
support spending ahead.

As a result, growth should be between 2.75% in the pessimistic
scenario and 4% in the more optimistic one.

Lacker was less uncertain about the inflation trend.

“While oil prices have stabilized of late and have reduced overall
inflation, this is likely to prove temporary and I expect inflation to
average close to 2 percent over the coming year,” Lacker said.

Against this backdrop, he opposed additional monetary policy
stimulus.

** Market News International **

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