Fed should rethink stimulus given strong growth: Lacker

NEWARK, Delaware Tue Feb 8, 2011 1:08pm EST

NEWARK, Delaware (Reuters) - The Federal Reserve should seriously consider pulling back on its $600 billion stimulus program given stronger growth and a brighter jobs picture, Richmond Fed President Jeffrey Lacker said on Tuesday.

Despite a report last week showing only 36,000 jobs were created in January, Lacker said other measures were pointing to a firmer economic recovery and better employment prospects.

"An array of forward-looking indicators of employment trends point to continued labor market improvement," Lacker, a known inflation hawk, told a business gathering at the University of Delaware.

In November, the Fed launched a controversial bond-buying program to support a fragile recovery. Lacker noted the central bank had committed to regularly review the pace and size of purchases.

"The distinct improvement in the economic outlook since the program was initiated suggests taking that reevaluation quite seriously," he said.

Lacker expects the U.S. economy, the world's largest, to expand by about 4 percent in 2011, a rate he said should be sufficient to boost hiring and lower unemployment.

The U.S. jobless rate fell to 9.0 percent in January from 9.4 percent in December. It has dropped 0.8 of a percentage point since November, the biggest two-month decline since 1958.

"I'm not ready to stop (bond buys) right now," Lacker said during a panel discussion following his speech. But strong readings on jobs and sustained consumer spending would warrant a reevaluation, he added.

Fed Chairman Ben Bernanke made clear in remarks last week he does not consider progress on jobs sufficient to declare victory and begin withdrawing monetary support.

While many Fed officials consider inflation to be too low at the moment, Lacker reiterated his case that prices are actually "low and stable." He told reporters that core inflation, which excludes food and energy and has been hovering at record lows, has probably bottomed.

Indeed, he said, it was still unclear whether recent spikes in commodities prices would have longer-lasting effects on U.S. consumer prices.

"The effect on overall inflation could be transitory, or could persist if firms, encouraged by accelerating demand growth, pass input prices on to their customers," Lacker said.

"Such pickups in inflation are common at this point in business cycle upturns, and would be consistent with the expected inflation rates implied by prices of inflation-indexed U.S. Treasury debt," he added.

Those readings now indicate traders expect inflation to average 2 percent over the next five years and as much as 3 percent over the following five years, Lacker said.

Some analysts blame the Fed's ultra-loose monetary stance for boosting financial market liquidity and helping to fuel runaway gains in commodities that have pushed up the costs of basic goods like food and energy.

Lacker said such charges were unfair.

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Comments (4)
DrJJJJ wrote:
75%+ of QE1 went to state governments! Every heard of the saying rob Peter to pay Paul? $14T is now 100% of US GDP! Many more trillions in debt coming soon!

Feb 08, 2011 11:29am EST  --  Report as abuse
chapapet wrote:
core inflation vs. “basic goods”, food and energy…
what am I missing, one of these has risen over 35% in the past six months and tthe other double digits where we get less for the same price or more…
it must be me, how outrageous is it that I want to have a warm place to live, eat and sleep, better yet that I could have a nutritious meal for a reasonable price…
pardon me but it would be better if my put my foot in my mouth with mustard, or burn some furniture for the energy necessary to warm us…
boy are we mixed up with the translations we get from the “supposed” experts…
Thank you…

Feb 08, 2011 1:28pm EST  --  Report as abuse
bartleby wrote:
36,000 jobs, nearly all low-wage, temporary jobs. We’re back!

Feb 08, 2011 6:13pm EST  --  Report as abuse
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