By Steven K. Beckner and Yali N’Diaye
(MNI) – Richmond Federal Reserve Bank President Jeffrey Lacker said
Monday he wouldn’t rule out further monetary stimulus if inflation were
to persistently fall below target, but warned that, as things now stand,
additional stimulus would be likely to increase inflation without doing
much to spur economic growth.
Lacker, appearing on Fox Business News, said the Fed’s policymaking
Federal Open Market Committee is likely to need to raise the federal
funds rate from near zero by the end of 2013. Following the FOMC’s last
meeting on April 25, he had said mid-2013.
Lacker was alone once again in dissenting against the Federal Open
Market Committee’s decision last Wednesday to prolong its “Operation
Twist” program of putting downward pressure on long-term interest rates
through bond purchases financed by sales of short-term securities.
Both the FOMC policy statement and participants’ revised economic
projections had a distinctly gloomier tone, and Fed Chairman Ben
Bernanke told reporters following the meeting that the Committee is
prepared to do more to boost economic growth, including a third round of
large-scale asset purchases or “quantitative easing.”
Asked whether the FOMC was setting the stage for “QE3,” Lacker
said, “nothing is ever a foregone conclusion” and said he and his
colleagues “will take it a meeting at a time, and it’s going to depend
on how the data comes out.”
He acknowledged that “growth has clearly weakened in the last
couple of months,” but observed, “if you look at the last couple of
years, it looks like this recovery is one that is going to be
characterized by swings between stronger growth and much more
disappointing weaker growth.”
Bernanke said the FOMC could effectively do more to help the
economy if needed, but Lacker disputed that.
“I think monetary policy doesn’t have a lot of capability right now
for really enhancing the growth we see out of the economy,” he said. “I
think the impediments to growth are things that monetary policy is
really not that capable of offsetting.”
“We have a major fiscal adjustment ahead of us in the United
States, and I think the size of that, the dimensions of it, where it’s
going to land, who it’s going to affect is very uncertain, and I think
that uncertainty is having a detectable effect on activity growth right
now,” he added.
While doing little or nothing to stimulate growth, QE3 would risk
higher inflation, in Lacker’s view.
“I think monetary stimulus can be effective in raising inflation,
and that’s what we know from centuries of economics to be true,” he
said.
“Whether it affects growth or not depends on the circumstances,
depends on the situation,” he continued. “I don’t think we’re in a
situation where it would have a meaningful effect on stimulating growth
beyond a transitory period.”
“I think further stimulus at this point would most likely just
raise inflation,” he went on. “Inflation is running around 2%. That’s
our stated objective. I don’t think we want to increase it from there.”
Many of his colleagues have downplayed inflation risks and even
cited the risks of excessive disinflation. The FOMC statement
anticipated that inflation would run “at or below” the Fed’s 2% target.
But Lacker emphasized, “You don’t want to see it (inflation). You
want it to average around 2%.”
He conceded that “we’ve got a little bit of softness on the
inflation front now with oil and energy prices coming down.” But he said
the downswing in price indices is apt to prove “transitory,” and added,
“I think inflation is headed back to 2%.”
None of this means Lacker is anxious to tighten monetary policy
right away, as he made clear.
“I’m comfortable with the broad amount of monetary stimulus out
there in terms of our stance,” he said. “I think we’re okay now.”
“I don’t think we have to withdraw stimulus right now,” he
continued. “I don’t think we have to begin exiting right now.”
But Lacker cautioned, “I think we’re going to have to…choose the
right time so that we do it to prevent inflation from rising.”
“We don’t want to wait until inflation goes up,” he said. “At that
point it will be too late.”
As to the exact timing of rate hikes, Lacker indicated that the
recent slowdown has delayed his assessment of when the Fed should begin
raising the funds rate.
“My sense over the course of this year has been that we were likely
to need to raise rates sometime in the 2013 time horizon,” he said.
“Maybe late 2013 (not mid-2013) is a little more appropriate now with
the growth outlook weakening.”
“I think we’re probably going to have to raise rates next year, but
it’s going to depend on the data,” he added.
But, like other Fed “hawks,” Lacker said he wouldn’t totally rule
out QE3 under any and all circumstances.
“If inflation fell in a sustained way and we needed to boost
inflation to get it back to … target I would favor monetary stimulus,
no question about it,” he said.
** MNI **
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