UPDATE 2-Fed's Lacker: U.S. April jobs data shows need to taper bond buying

Fri May 3, 2013 3:16pm EDT

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By Alister Bull

RICHMOND, Va. May 3 (Reuters) - Stronger U.S. job creation in April reinforces the argument to scale back Federal Reserve bond purchases, one of the central bank's most hawkish policy-makers said on Friday, after better than expected data eased concern the U.S. economy had stumbled.

"I don't think there is any question...that we've seen substantial improvement in the labor market outlook over the last 6 months," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.

Non-farm payrolls rose 165,000 last month and the unemployment rate fell to 7.5 percent, a four-year low, from 7.6 percent, the Labor Department said earlier on Friday. In addition, hiring was much stronger than previously thought in the prior two months.

The Fed voted on Wednesday to keep buying bonds at a monthly pace of $85 billion, and to maintain this so called quantitative easing until it spotted the substantial improvement that Lacker, who opposes the program, said was now evident.

Noting that employment creation over the last six months had averaged around 200,000 a month, he said this should trump a weak employment reading in March which, in any case, had now been revised higher.

"It is clear that the labor market outlook isn't worse, and if anything, it is substantially better, and I think you ought to evaluate the likelihood of us reducing the pace of asset purchases accordingly," he told the Richmond chapter of the Risk Management Association.

UBER HAWK

Lacker is one of the most hawkish, or anti-inflation minded, officials on the Fed's 19-member policy-setting committee. When he was a voting member of the committee last year, he dissented at every meeting in opposition to its aggressive policy actions.

According to a Reuters poll released last month, most analysts expect the Fed to keep buying bonds into next year.

It has tripled the size of its balance sheet since it began this program in response to a severe 2007-2009 recession, while also holding interest rates near zero since late 2008.

The U.S. economy grew at a 2.5 percent annualized pace in the first quarter, up from 0.4 percent during the previous three months, and Lacker said this performance had been pretty impressive, given the headwinds confronting growth.

These included a recession in Europe and the uncertainty created by a large number of new regulations that U.S. firms must adopt, as well as a fiscal outlook which "is a mess".

Weaker readings from some forward-looking indicators have hinted the economy might suffer a 'spring swoon'. Lacker acknowledged that manufacturing might have lost some steam. But he played down recent low readings in inflation that some have pointed to as a sign the nation risks a damaging deflation.

"The recent behavior of inflation has been heartening," he said. "Measures of inflation remain with ranges consistent with price stability, and the low current readings on some inflation indices are likely to be transitory."

The Fed's preferred gauge of price pressures faced by consumers, the pce price index, slowed to 1.0 percent in March versus a year ago.

That was its lowest rate in 3-1/2 years and well beneath the Fed's goal for 2 percent, spurring speculation in financial markets that the central bank might consider increasing its bond purchase program from a current rate of $85 billion a month.

In fact, the Fed spelled out in a statement issued after its policy meeting ended on Wednesday that it could increase the pace of bond buying if warranted by the outlook for prices and employment, although it did not alter its language on inflation.

Lacker noted that the PCE had averaged 1.2 percent over the last four quarters and acknowledged that was "on the low side of our recent experience." But he said that he expected inflation to edge back toward 2 percent by next year.

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