UPDATE 1-Lacker says Fed should be on hold, not easing

Thu Nov 15, 2012 10:42am EST

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By Pedro Nicolaci da Costa

CHARLESTON, W.Va Nov 15 (Reuters) - The Federal Reserve should keep monetary policy on hold rather than loosen conditions further given an anemic but ongoing recovery, Richmond Fed President Jeffrey Lacker said on Thursday.

Lacker, an inflation hawk who has dissented at every Federal Open Market Committee Meeting this year, said central bank policy has done all it can for the U.S. economy, adding that the supply of bank reserves was sufficient to help the expansion along.

"We should be standing pat now rather than easing policy further," Lacker told the West Virginia Economic Outlook conference. "It's not clear whether monetary policy, by itself, can bring about any material improvement in economic growth right now."

Lacker says he expects U.S. economic growth to grow at 2 percent or above in 2013, and picking up steam as the coming year draws to a close. He said inflation will remain at or a little below the Fed's 2 percent target despite a recent uptick related to higher gasoline costs.

Key risks to the U.S. economy, including U.S. budget uncertainty and Europe's recession, are likely to abate next year, Lacker said.

If Congress does come to some sort of fiscal resolution before year end, growth could hit 3 percent or more in 2013, Lacker said. "Rapid and convincing progress toward fiscal sustainability ... might release a rush of pent-up spending," he said.

Conversely, the absence of a resolution to the so-called fiscal cliff of expiring tax cuts and drastic spending reductions could lead to a small contraction in the economy lasting one or two quarters, Lacker cautioned.

The Fed recently launched a third round of asset purchases or quantitative easing, saying it would purchase $40 billion in mortgage-backed securities a month to give some extra impetus to a fragile economic outlook.

In response to the financial crisis and recession of 2007-2009, the Fed slashed official rates to effectively zero and bought some $2.3 trillion in assets in an effort to keep long-term rates down and bolster growth.

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