ASHEBORO, N.C. — The costs exceed the benefits of the Federal Reserve continuing its large-scale asset purchases, Richmond Federal Reserve Bank President Jeffrey Lacker strongly suggested Thursday.
Lacker said limits on growth of both productivity and the number of workers is apt to restrain real GDP growth to little more than 2%, despite the Fed's aggressive monetary stimulus measures. Meanwhile, he said the costs and risks grow the more the Fed's balance sheet expands.
Lacker, who is not a voting member of the Fed's policymaking Federal Open Market Committee this year or next, also pointed to forces that are making firms and households "cautious" about hiring, spending and investment. Among those, he cited "a substantial increase" in government regulation and the Affordable Care Act.
The Richmond Fed chief has long opposed the Fed's $85 billion monthly "quantitative easing," and he reiterated that stance in remarks prepared for the SCORE group of business and community leaders in this Piedmont North Carolina city.
"The key issue, in my view, is the extent to which the benefits of further monetary stimulus are likely to outweigh the costs," he said.
"Economic growth trends currently appear to be driven mainly by population growth and productivity growth, in which case monetary stimulus will only have limited and transitory effects," he continued. "But further stimulus does increase the size of our balance sheet and correspondingly increases the risks associated with the 'exit process' when it becomes time to withdraw stimulus."
"This is why I have not been in favor of the current asset purchase program," he added.
Prefacing those brief comments on monetary policy, Lacker outlined the reasons why he thinks the U.S. economy has continually underperformed Fed and private projections and why he thinks it is likely to continue to do so.
He foresaw real GDP growth at 2% or "a bit" more again in 2014. He said inflation should rise back to the Fed's 2% target over the next year or two.
Lacker said both lenders have been "re-evaluating the riskiness associated with indebtedness," making credit less available.
So he said consumers have become "somewhat cautious in their spending behavior."
"Businesses also appear to be quite cautious about their investment and hiring plans," he said, adding that the "most frequent answer in the latest survey (of small businesses) was 'government regulations and red tape.'"
Lacker said that survey finding "accords with reports that I have been hearing from business contacts for several years now."
"There appears to have been a substantial increase in the pace of regulatory change, which in itself seems to be limiting investment and hiring," he said. "Moreover, it appears that there is also greater uncertainty about the exact requirements of current regulations and the likely impacts of new regulations that are coming along."
He said "that uncertainty provides an additional reason for firms to postpone expansion plans."
Lacker said fiscal policy is "adding to the uncertainty."
Another impediment to growth going forward will be the overhaul of the health care system, he warned. "When the Affordable Care Act is fully implemented, it is likely to add to the cost of hiring an additional worker for many businesses, and firms are still trying to figure out just how costly that will be."
Lacker suggested there are structural barriers to growth which the Fed cannot surmount with bond buying.
Noting that productivity growth has slowed from 1.8% to 0.9%, he said, "it's hard to see why productivity growth would improve dramatically."
What's more, "an imminent acceleration in employment does not seem likely to me."
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