Fed's Lacker: Tapering Not Represent 'Meaningful' Tightening

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Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks to the DC Chamber of Commerce in Washington, D.C., U.S., on Friday, May 8, 2009. Major U.S. banks are capable of supporting an economic recovery later this year, Lacker said, a day after the Federal Reserve indicated 10 lenders need to raise a total of $74.6 billion in capital. Photographer: Brendan Hoffman/Bloomberg News

PHILADELPHIA — Richmond Federal Reserve President Jeffrey Lacker Friday said any decision by the Fed to taper its monthly bond-buying program would not represent monetary tightening.

"Tapering is not a tightening of monetary policy in any meaningful sense," Lacker told business leaders after a speech in Philadelphia. "Reducing the pace of purchases is easing monetary policy at a less-rapid pace."

Echoing Fed Chairman Ben Bernanke, Lacker said the Fed will continue its monthly bond purchases until the jobless rate improves.

"We're going to do this until we see a substantial improvement in the outlook for labor market conditions," he said.

But asked about the unintended consequences of quantitative easing, Lacker said it may have created unrealistic expectations that the Fed is able to significantly drive down unemployment.

"One of the under-appreciated consequences of QE has been the sense that it's given rise to that the central bank has responsibility for real economic outcomes," he said.

Any effect that monetary policy can have on the jobless rate in the long term is "modest and transitory," he said.

Still, labor force conditions have recently improved 'pretty significantly", as shown by the cumulative falls in both the jobless rate and the number of people in jobs, he said.

Lacker said he was "surprised" at the subdued level of inflation and inflation expectations given the dramatic expansion of the Fed's balance sheet to some $4 trillion.

"Given the expansion of our balance sheet, inflation expectations have remained stable, and apparently as result inflation itself has remained remarkably stable," he said.

But he suggested that the Fed's credibility may at some point be threatened by its continued quantitative easing.

"I remain though, as a central banker, constitutionally unwilling to take that for granted," he said. "Credibility can erode, things can change."

He said that monetary policy needs to work in tandem with fiscal policy, and that excessive deficits risk eroding the Fed's success in controlling inflation.

"Some modest measure of fiscal stability is essential for monetary stability," he said. "To me, that's one of the things on the horizon that could conceivably threaten the success we've had in limiting inflation expectations."

"A fiscal authority can force the central bank's hand by running a big enough deficit," he said. "It can swamp our resolve."

Asked whether deflation was a threat to the economy given low consumer prices offered by some major retailers, Lacker warned that a holistic price picture should be taken into account before drawing conclusions about the threat of deflation.

"It's not enough just to look at Wal-Mart to see whether there's deflation," he said. "You have to look at the whole basket."

He said that consumers have deleveraged since the recession, and show no signs of returning to a pattern of taking on excessive debt. Consumer spending looks headed for sustained growth of about 2%, he said.

"It looks like consumers are looking after their balance sheets," 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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