WASHINGTON — In an attempt by yet another Federal Reserve official to clarify the meaning of the latest comments from the central bank, Richmond Federal Reserve Bank President Jeffrey Lacker said Friday the Fed will continue in effect to add accommodation over the next year, just at a slower pace and provided economic data confirm the Fed's forecasts.

"The balance sheet continues to expand, consistent with Fed Chairman Ben Bernanke's announcement last week that the Federal Open Market Committee anticipates reducing the pace of asset purchases later this year and ending purchases around mid-year 2014, provided incoming data are broadly consistent with the Committee's forecast," Lacker said in a speech prepared for delivery to the Judicial Conference of the Fourth Circuit in White Sulphur Springs, W.Va.

"This means that over the course of the next 12 months, the Committee will be reducing only the pace at which it is adding accommodation," Lacker said. "In other words, the Federal Reserve is not only leaving the punch bowl in place, we're continuing to spike the punch, though at a decreasing rate over the next year."

While expecting low growth rates "to persist for several years," Lacker added that further accommodation would do little, if anything, to boost economic activity, since it is largely impeded by structural factors that cannot be offset by monetary policy actions.

"In this situation, the benefit-cost trade-off for further monetary stimulus does not look promising," he said. "I seriously doubt additional monetary stimulus can provide much impetus to real growth right now."

Still, Bernanke's comments have heightened market volatility, which, however, does not affect Lacker's expectation a U.S. GDP growth rate "around" 2% in the "foreseeable future."

Deeming the bond and stock market selloff in the aftermath of remarks by Bernanke — who was "wise" to clarify the FOMC's expectations — was not "too surprising," Lacker in fact expects even more volatility in the quarters to come.

"As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely," said Lacker, who is not a voting member on the policy making committee this year.

"This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented today," he said.

The Fed should manage to keep inflation in check, he predicted, estimating "the low current inflation readings are likely to be transitory" and will eventually edge back towards the FOMC's 2% target "by next year."

Inflation, which "remains well contained," was not the only bright spot in his macroeconomic analysis.

On the growth front, he said "the private sector seems to be in reasonably good shape."

He highlighted the "solid growth path" taken by the housing sector, bolstering household confidence in the market value of their homes.

In addition, consumer spending has been holding up "pretty well so far this year," he said, while business capital expenditure is "likely to make a solid contribution to growth over the next few years."

Despite the positive trends he highlighted, Lacker stressed the housing sector by itself will not have "a large effect on total GDP growth."

In addition, "fundamentals make it hard for me to be bullish about a pickup in consumer spending growth," he said, citing higher taxes, fiscal, regulatory and structural headwinds.

As a result, he has "become increasingly persuaded," he said, "that low growth rates are likely to persist for several years," citing "the combination of relatively low productivity and employment growth" as structural impediments.

On the fiscal front, his analysis was unequivocal: "the federal fiscal outlook is a mess" with no grand bargain in sight that would bring back the country's finances on a more sustainable path.

On the regulatory front, the "large volume" of new regulation threatens to add "large compliance costs" for businesses that could hamper hiring and investment.

Still, over the next couple of decades, "I am fundamentally quite optimistic about prospects for the U.S. economy," he said.

Until then, growth is bound to grow at a "moderate" pace.

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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