Fed's Lacker sees $10 billion taper on table at next meeting

RALEIGH, North Carolina Fri Jan 10, 2014 12:48pm EST

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, participates in a session titled, ''Help or Harm: Central Bank Monetary Policies at the Outer Limits'' NABE Economic Policy Conference in Washington March 5, 2013. REUTERS/Yuri Gripas

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, participates in a session titled, ''Help or Harm: Central Bank Monetary Policies at the Outer Limits'' NABE Economic Policy Conference in Washington March 5, 2013.

Credit: Reuters/Yuri Gripas

RALEIGH, North Carolina (Reuters) - U.S. Federal Reserve policymakers will likely discuss another $10 billion reduction in the monthly pace of bond buying at their next meeting, said a senior Fed official on Friday, who warned against reading too much into a weak jobs report for December.

Richmond Federal Reserve President Jeffrey Lacker said it would take a "couple of quarters" of bad news to change the U.S. economy's improving trend.

The Fed last month announced it would cut its bond-buying stimulus by $10 billion to $75 billion each month, citing progress in the labor market, and Lacker said he expected another such reduction would be on the table at the next meeting on January 28-29.

"I would expect a similar reduction in pace to be discussed at the upcoming meeting," Lacker told reporters after a speech to a business group.

The government on Friday said nonfarm payrolls grew just 74,000 in December, far less than in the prior two months, but economists largely blamed frigid temperatures in large areas of the country for the lackluster report.

Although he said he had not seen the details of the jobs report, Lacker said one data point would not change policymakers' view.

"It takes a lot more than one labor market report to be convincing that the trend has shifted and in my experience one employment report rarely has an effect by itself on monetary policy," said Lacker, who has been an opponent of bond buying from its start.

In a speech to the Greater Raleigh Chamber of Commerce, he said a recent pick-up in U.S. economic growth was encouraging, although he expected the pace of expansion to ease this year to closer to 2 percent.

POTENTIAL HEADWINDS

Fiscal policy, a downshifting in household spending and a reluctance by business to hire and invest would all dampen growth, he said, urging lawmakers to act quickly to fix long-term budget imbalances.

New healthcare rules also needed to be watched carefully given the potential impact on hiring plans, especially for small business, and general uncertainty about their implementation.

"I think the Affordable Care Act is something that we are watching very closely because it's something that could well have a substantial economic impact," he said.

Some policymakers have expressed concern about inflation running persistently below the Fed's 2 percent target. On a measure closely followed by the Fed, annual inflation is just 1.1 percent.

Lacker said he was confident inflation would move back towards 2 percent in the next year or two but added: "This is not a certainty, however, and I believe the FOMC will want to watch this closely," referring to the policy-setting Federal Open Market Committee.

The Richmond Fed president also played down a drop in interest rate futures prices, which is having the effect of pulling forward the market's timeline for the Fed's first rate hike.

"My sense is that markets have a good solid appreciation of the committee's likely reactions with regard to interest rates," he said, noting that forward guidance had been strengthened just last month.

"I interpret changes in the forward curve as reflections of changes in expectations about growth and other determinants of short-term interest rate setting by the committee."

Lacker also said the Fed would have to think carefully about other policy options, including changing the rate banks are paid on excess reserves, which some policymakers have suggested cutting.

"I think we have to sort out what are our options there and evaluate what a good path forward could be, and I expect us to be paying some attention to that in the months ahead," he said.

(Reporting by Krista Hughes; Editing by Andrea Ricci)

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Comments (1)
lottopol wrote:
Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a “normal” level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 25 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, When the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the clams of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years….”
http://seekingalpha.com/article/1514632

Jan 10, 2014 11:34pm EST  --  Report as abuse
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