BALTIMORE — Richmond Federal Reserve Bank President Jeffrey Lacker said Friday "that further monetary stimulus is unlikely to materially increase the pace of economic expansion, and that these actions will test the limits of our credibility."

In remarks prepared for the Maryland Bankers Association's Sixth Annual First Friday Economic Outlook Forum, lacker, who is not a voting member of the Federal Open Market Committee this year, also stressed that the central bank's policy raises inflation risks.

"At some point, we will need to withdraw stimulus by raising interest rates and reducing the size of our balance sheet, and the larger our balance sheet, the more vulnerable we will be to seemingly minor miscalibrations in policy," said Lacker, who dissented from the FOMC's decision at its December meeting.

"Accordingly, I see an increased risk, given the course the Committee has set, that inflation pressures emerge and are not thwarted in a timely way," Lacker said.

Therefore, "I intend to remain alert for signs that our monetary policy stance needs adjustment," he added.

For now, however, Lacker, who supports a numerical inflation objective, expects headline inflation to average slightly less than 2% this year.

The FOMC adopted further quantitative easing measures at its December meeting, and expressed its policy guidance as a function of the unemployment rate, with 6.5% as the threshold.

But for Lacker, more stimulus is unlikely to "materially" increase real economic growth "on a sustained basis."

Besides, "fundamental prospects for longer-term U.S. growth remain quite strong," Lacker said.

In the shorter term, Lacker expects growth to continue into next year at an annual rate of about 2%, "as many of the recent impediments to faster growth continue to restrain activity."

Those factors include developments and economic prospects in Europe, the long-term tax and pending paths, regulatory policy and fiscal policy.

"Beyond 2013," Lacker said, "the rate of growth could rise if the effects of these restraining factors ease, which seems plausible."

Significant progress on the federal budget front would also reduce policy uncertainty that contributed to dampen growth last year.

Overall, Lacker said, "this economic expansion, while disappointing, may be the best we should expect given the large decline in the housing market."

And on that front, he does not expect to return to the "booming housing market conditions" that prevailed before the recession given the "substantial overhang of homes" that poorly match what consumers can afford.

"While significant progress is evident, we have not completely worked through that oversupply," Lacker said, also pointing out that the recession has made many households more "cautious and less willing to spend."

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