WASHINGTON — Richmond Federal Reserve Bank President Jeffrey Lacker Thursday urged against any further injections of monetary stimulus into the U.S. economy, arguing that a ballooning balance sheet complicates the central bank's exit strategy down the road, and it is not certain that more aid from the Fed — on its own — would have a material impact on economic growth right now.
"Much of the recent sluggishness is understandable," Lacker said of the recovery in remarks prepared for delivery at the West Virginia Economic Outlook Conference in Charleston, W.Va. "In fact, if you look back at how advanced economies have typically behaved following recessions associated with housing slumps, you will find that our current recovery is actually not out of the ordinary," he added. Lacker is a voter on the Fed's policymaking Federal Open Market Committee this year, and he warned that the larger the Fed's balance sheet when the time comes to withdraw monetary stimulus, "the more difficult and risky that process will be." "In my view, the balance of considerations suggests that we should be standing pat now rather than easing policy further," he said. He projected that U.S. economic growth will continue into 2013 at an annual rate of 2% or above, with growth firming towards the end of the next and seeing further improvement beyond that. So beyond hitting its 2% inflation target, "it's not clear whether monetary policy, by itself, can bring about any material improvement in economic growth right now," Lacker said. The supply of bank reserves is already quite ample and large enough to support a strengthening recovery, he said, so continuing large scale asset purchases and adding to these reserves would jeopardize the Fed's inflation goal. Lacker's main concern, however, is that the Fed's aggressive measures to support a slow economic recovery might have added further complications to what will already be a delicate exit process. "As a practical matter, we are in uncharted territory, and that will make it difficult to get the timing just right," Lacker said. While the Richmond Fed chief is "cautiously optimistic" about the near-term outlook for the U.S. economy, as well as its longer-run growth prospects, he cautioned that several important suppositions lie behind his forecast. "First, I expect to see meaningful progress on federal budget issues now that the election is behind us," Lacker said, adding that Congress must show convincing progress toward a sustainable long-run trajectory for federal policy in order to alleviate the worries of the private sector. "Giving the proverbial can a few more kicks down the road is likely to mean continued uncertainty and further disappointment with labor markets," he said. Across the Atlantic, while the recession in the euro area and its fiscal struggles pose risks to the U.S., Lacker said he expects those risks to diminish next year. Eurozone authorities have made "notable progress" towards bolstering the monetary union's institutions, he said, with the spillover from the crisis to U.S. banks and financial markets limited so far. In addition, he said his U.S. outlook is predicated on a continuation of the current gradual improvement in household confidence — where improvements in labor market effectiveness and modest growth in home prices should combine to reduce consumer apprehension about downside risks and therefore bolster spending. Finally, Lacker said the outlook is based on the assumption of no unforeseen shocks; such as a sharp rise in energy prices or an unexpected downturn among the United States' major trading partners. Both scenarios have the potential to impede U.S. growth, he said, although the former would only have a temporary effect.