Lacker: Strong Jobs Data Shows 'Substantial' Labor Market Improvement

RICHMOND, Va. — Richmond Federal Reserve Bank President Jeffrey Lacker described Friday morning's April employment as "strong" and said recent months' jobs data collectively show that there has been sufficiently "substantial" improvement in the labor market outlook for the Fed to scale back its bond buying.

Lacker said the Fed should give priority to reducing, if not eliminating its purchases of mortgage-backed securities.

Lacker, responding to questions from reporters and others following a speech at the Risk Management Association of Richmond, also reiterated in the strongest terms that the monetary policy is incapable of accelerating economic growth in any lasting way.

He said it is "preposterous" to think the Fed could increase the GDP growth rate from 2% to 3% and said asset purchases may well be "virtually irrelevant" in terms of either increasing demand or exerting inflationary pressures.

The Labor Department announced that non-farm payrolls rose 165,000 in April and revised the two prior months' payrolls higher by a combined 114,000.

Citing those "strong" data and discounting the weak March job gain as "an aberration," Lacker said there has been "pretty steady" job growth.

The Fed's policymaking Federal Open Market Committee has said, most recently on Wednesday when it reaffirmed plans to buy $85 billion of Treasury and MBS per month, that it will continue asset purchases until it sees "substantial" improvement in the outlook for the labor market. And Lacker, who is not an FOMC voter this year, said that goal has been met.

"I don't think there's any question that we've seen substantial improvement," he said. "It's clear that the labor market outlook isn't worse; if anything it's substantially better."

He said the April rise coupled with upward revisions are "a vivid illustration of the danger of pinning too much on one particular report."

Lacker advised the audience to "evaluate the likelihood of us reducing the pace of asset purchases accordingly."

Not only is so-called "quantitative easing" ineffective, it complicates the Fed's eventual exit from accommodation and it is running mounting financial risks, he argued.

Noting that the Fed has "gobbled up a lot" of MBS, Lacker said, "that's not something the Fed should do."

"We've done that to try to boost the housing market" and "to try to lower rates in the housing market below where would otherwise have been."

But he said this means that "rates for other borrowers are higher than they otherwise would be."

Lacker said "the housing market seems like it is recovering quite well" and said this "implies we ought to be thinking about shifting our portfolio away from MBS."

If the Fed doesn't stop or reduce MBS purchases, it runs the risk that "we will overdo it and overstimulate the housing market," he said.

Lacker said the Fed could lower its MBS holdings over "a couple of years" by, for example, reinvesting proceeds of maturing MBS in Treasuries instead of MBS.

When it starts tapering asset purchases, Lacker said the Fed should reduce MBS first and/or reduce MBS purchases more than Treasury purchases.

Whatever the method, "we ought to be actively thinking about getting out of MBS," he said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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