WASHINGTON — Richmond Federal Reserve Bank President Jeffrey Lacker Monday reiterated his view that growth will begin to strengthen "later next year" in an overall "cautiously optimistic" assessment of his outlook.
In remarks prepared for the Roanoke Regional Chamber of Commerce in Virginia, Lacker described his outlook as "cautiously optimistic" for output and employment growth, noting that "Labor market conditions have been particularly disheartening" since the end of the second quarter of 2009.
That being said, "The most recent rate of job growth is fairly close to the average for this recovery, suggesting that the slowdown in the second quarter was a transitory swing," Lacker commented.
Besides, Lacker said that while the unemployment rate is likely to "decline gradually" over time in absence of further shocks, monetary policy is not the only factor at play.
"There are significant social costs associated with delaying the recovery in labor market conditions too long," he said. Thus the success of monetary policy in meeting its employment mandate should not be solely based on the observation of high unemployment rates.
In fact, "While I have objected to some specific monetary policy decisions, the fact that inflation has stayed around 2 percent is evidence that monetary policy has done reasonably well in recent years," Lacker said, adding "Maintaining that record of success should be our focus in the years ahead."
Enumerating factors at play in the currency state of labor markets, Lacker cited the housing market that "is still coping with the large inventory overhang that remains from the pre-recession boom."
"The significant shift in economic activity away from residential construction and related supply industries," is another factor, as is consumers' cautiousness when it comes to spending.
In addition, Lacker cited uncertainty, not only regarding Europe, but also and especially regarding fiscal policy, which is especially mentioned by business contacts.
In the short term, the fiscal cliff in the absence of Congress action would likely lead to a recession.
In the longer run, "At some point, Congress will have to align taxes and spending," Lacker also stressed.
Overall, the central banker estimates that, "Uncertainty is likely to continue to dampen U.S. growth until there is greater clarity about legislation that Congress and the president are likely to adopt," adding that the sluggishness of the economy in the end is "understandable." It's the depth of the contraction, Lacker said, that is "exceptional."
Against this backdrop, "My best guess is that growth will begin to firm later next year and continue to improve beyond that," Lacker said, reiterating comments he made last week.
"While the recession in Europe poses risks for this outlook, I think those risks will likely dissipate next year as leaders work through the adjustments necessary for creating a new fiscal regime," he continued. "As U.S. labor markets continue to heal, I expect household confidence to slowly firm and bolster consumer spending."
And over the longer term, he estimates that prospects for U.S. growth "remain quite promising."
Turning to monetary policy, Lacker repeated the views he expressed last week, highlighting his objection to the Fed' forward guidance that he considers to be an "imperfect way to communicate about future policy."
Lacker also opposes mortgage-backed securities purchases, the benefits of which are "likely to be small."
And "if we are going to purchase more assets, it would be better to purchase Treasury securities rather than agency mortgage-backed securities," Lacker said.