RICHMOND — Richmond Federal Reserve Bank President Jeffrey Lacker argued Friday that the Fed cannot effectively stimulate the economy in the face of fiscal, regulatory and other forces and that continuing to pump money into the economy through asset purchases increases financial risks.
In the first public speech on the economy by a Federal Open Market Committee member since the FOMC opened the door to expanded asset purchases Wednesday, Lacker said the economy has likely settled into a 2% growth trend, which the Fed is unlikely to be able to accelerate, for a host of reasons.
In large part, GDP growth has slowed because of slower productivity growth and reduced labor force participation, he said in remarks prepared for delivery to the Risk Management Association of Richmond.
But Lacker, who is not an FOMC voter this year, said the economy's woes are being aggravated by a number of "challenges" beyond the control of monetary policy, including a fiscal "mess," Europe's recession and "the large volume of new regulation."
He suggested the Fed should confine itself to focusing on something it can control -- inflation. He noted that inflation is "well-contained." Though running well below the FOMC's 2% target, he said it is likely to move back toward that pace.
The Fed has been striving to speed the pace of GDP growth to reduce unemployment not only by holding short-term interest rates near zero since December 2008, but also by three rounds of large-scale asset purchases or "quantitative easing." Two days ago, the FOMC reaffirmed monthly purchases of $85 billion of Treasury and mortgage backed securities and opened the door explicitly to even larger purchases.
Lacker, who has never made any secret of his opposition to the continuation of such policies, took aim once again at the FOMC's effort to spur growth via bond buying that expands bank reserves and the Fed's balance sheet.
"A highly expansive policy was an appropriate response to a severe recession," he said, but "growth has resumed, ... and it appears as if it's limited, in large part, by structural factors that monetary policy is not
capable of offsetting."
"In this situation, the benefit-cost trade-off associated with further monetary stimulus does not look promising," Lacker continued. "The Fed seems to be unable to improve real growth, despite striving mightily over the last few years, and further increases in the size of our balance sheet raise the risks associated with the 'exit process' when it's time to withdraw stimulus."
"This is why I do not support the current asset purchase program," he added.
Lacker said "keeping inflation low and stable is within the capability of a modern central bank," and "on that score, the recent behavior of inflation has been heartening."
The FOMC changed its policy statement to formally allow for either"increasing or reducing" its asset purchases in wake of a series of weaker-than-expected economic reports.
Lacker acknowledged the data have been "disappointing lately," but he said, " our situation is not as dismal as many would have you think, and the economic landscape does have its attractive elements."
He went on to break down the two basic components of GDP growth - labor productivity and growth in employment - and noted that both have diminished.
"The slow growth in real GDP in this expansion is related both to lower productivity growth and to the decline in labor force participation," he said. "Some of the shortfall could reflect the lingering effects of the Great Recession on labor force participation. But longer-run structural trends, such as our aging population and the changing schooling decisions of young people, also seem to be playing an important role."
"If so, we need to adjust to the implication that GDP growth will continue to fluctuate around a 2 percent trend for the foreseeable future," he said.
Lacker observed that housing is "on a solid growth path," but said consumer spending, which accounts for a much larger share of GDP, is "sluggish." He blamed this on "sluggish compensation growth," higher taxes and "cautious attitudes."
He predicted business capital spending will make a "sizeable contribution" to growth in the next few years, but said the fiscal "mess" is causing a "pervasive uncertainty" that "has undoubtedly affected business and household decisions."
Another inhibitor is "the need for firms to adapt to the large volume of new regulation that has been added in recent years," Lacker said. "Even if net social benefits of new regulations are significantly positive, businesses may still face large compliance costs that in turn affect hiring and investment decisions."
"Moreover, many key decisions regarding implementation of far-reaching regulations have yet to be made, and this uncertainty is another factor affecting firms and households," he went on. "Banks, for example, are worried about new regulations on mortgage lending that have not yet been finalized."
"A wide range of businesses are worried about how to respond to new healthcare requirements, many of which have not yet been written," he added.
In the face of all these impediments, he said a 2% growth rate "actually looks like a fairly good outcome."
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