Fed's Lacker says tough to see pause in tapering ahead

WINCHESTER, Virginia Tue Feb 4, 2014 11:33am EST

Federal Reserve Bank of Richmond President Jeffrey Lacker testifies before the House Financial Services Committee hearing on ''Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts'' on Capitol Hill in Washington June 26, 2013. REUTERS/Yuri Gripas

Federal Reserve Bank of Richmond President Jeffrey Lacker testifies before the House Financial Services Committee hearing on ''Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts'' on Capitol Hill in Washington June 26, 2013.

Credit: Reuters/Yuri Gripas

WINCHESTER, Virginia (Reuters) - The U.S. Federal Reserve will probably keep reducing monthly asset purchases at its current pace and it would be hard to make the case for a pause in the tapering process, a senior Fed official said on Tuesday.

Richmond Federal Reserve President Jeffrey Lacker said U.S. stocks had performed well looking at the last year and recent moves likely reflected a downward adjustment in expectations for growth.

Importantly, moves in financial markets did not seem to have affected the outlook for jobs, a key benchmark for future policy at the U.S. central bank, which has started to trim back its policy stimulus by reducing asset purchases by $10 billion at each of its last two policy meetings.

"I think the hurdle ought to remain pretty high for pausing in tapering," Lacker, who has long opposed the aggressive stimulus, told reporters.

"We linked the asset purchase programs to significant improvement in the outlook for labor market conditions, that has definitely occurred, and I don't see financial market developments as having affected the outlook for labor market conditions materially at this point."

He declined to comment on what kind of scenario might pass the hurdle.

The Fed trimmed its monthly asset-purchase program to $65 billion per month last week and policymakers will not meet again until March. Lacker said he expected the current pace of a $10 billion reduction every meeting to continue and played down the chance of a bigger move.

Weak U.S. data pushed the benchmark S&P 500 index into its worst single-day drop in seven months on Monday and MSCI's benchmark index for emerging market stocks .MSCIEF hit its lowest level since August.

Lacker, who is among the more hawkish of the Fed's 17 current policymakers, said markets might be coming in line with his view that economic growth would slow this year to "a little above" 2 percent, citing muted spending by consumers and businesses and modest expected labor productivity.

"I think maybe now (they are) revising down their sense of how much momentum the second half is really providing us," he said in response to a question.

"I wouldn't call it 'turmoil' yet, we've still got a great stock market looking back over the last year."

Lacker's growth forecast is on the low end of the range of predictions, of between 2.2 percent and 3.3 percent GDP growth, made in December by Fed policymakers. New forecasts are also due in March.

GUIDANCE TWEAK

In a speech at Shenandoah University, Lacker also predicted, as most Fed officials have, that today's low inflation will rise to the Fed's 2-percent goal over the next year or two.

The central bank has said it will keep benchmark interest rates near zero well past the time unemployment falls below 6.5 percent, especially if inflation remains below target.

The jobless rate has now fallen to 6.7 percent and Lacker said the so-called forward guidance would have to be rejigged as and when that threshold was reached.

"We will have to reformulate it and provide some qualitative way of providing an assessment of what time horizon we think is most likely," said Lacker, who does not vote on monetary policy this year.

"I'd point out that the SEP (summary of economic projections) provides a rich portrayal of the array of views within the committee and even if we said nothing the SEP would be pretty informative."

Earlier, he told the audience there were various factors at play determining the timing of the first rate rise, noting he personally saw a move in early 2015.

"If we do see growth pick up to 3 percent, 2-3/4 percent on a sustained basis over three or four quarters, I think that would be a clear sign that increasing rates would be needed," he said, although an earlier, pre-emptive hike might also be appropriate.

"I think you are likely to hear communication from the Federal Reserve before it happens indicating that it's likely to happen soon, so I doubt we are going to surprise you," Lacker said.

(Reporting by Krista Hughes; Writing by Krista Hughes and Jonathan Spicer; Editing by Chizu Nomiyama)

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Comments (1)
This is a good example of nice man who learned about the theories and policies of Keynes and Hayek which applied to the UK eighty years ago and is unworldly about our commercial banks and businesses such that he naively thinks they apply to the United States today instead of the theories and policies of Stigler and Lindauer. Thus he and his fellow Fed officials continue to confuse the insignificant US target rate with the highly significant UK bank rate; confuse the policy implications of the fixed exchange of the UK eighty years ago with the fluctuating US rate today; and confuse the effect of quantitative easing eighty years ago which put loanable funds into commercial banks to affect the real economy with the effect of QE today which flows money abroad and into speculations instead of the real economy.

Such intellectual time lags are inherent in the academic world. Even today some MDs prescribe leeches instead of pharmaceuticals for high blood pressure because medical books written eighty years ago mentioned them.

With a little luck these medical and economimc Neanderthals and their students will die out. Hopefully while Stigler and Lindauer are still relevant.

Feb 04, 2014 4:15pm EST  --  Report as abuse
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