NEW YORK – Economic conditions make it “quite hard to justify additional monetary stimulus, absent a dramatic deterioration in economic conditions,” and this level of accommodation will not be warranted through 2014, Federal Reserve Bank of Richmond President Jeffrey M. Lacker said Wednesday.
“My projection is that if we want to keep inflation at 2 percent, we will likely need to raise rates in 2013,” Lacker said at the Economics Club of Hampton Roads Economic Conference, according to prepared text released by the Fed. "Incoming data could change my assessment in either direction; weaker data could lead me to push out my projection, and stronger data could lead me to advance my projection.”
His dissent to the Federal Open Market Committee statement in January was based on that belief. “I have continued to dissent against that specific language because my projection continues to differ significantly from the Committee statement,” he said.
Tallying the progress in the economy since the second quarter of 2009, Lacker noted, real income is up 4.8%, consumer spending grew 6.1%, real gross domestic product climbed 6.8%. In the labor markets, more than 3.5 million net new jobs have been created since early 2010, when unemployment was at its highest levels.
But, he noted, “many observers” consider the progress “sorely disappointing.” Lacker said, “the reasons are understandable,” since previous recessions yielded stronger recoveries, and 8.2% unemployment “is viewed as relatively elevated.”
While some point to the “moderate” expansion as proof the Fed should add stimulus, Lacker said, “I disagree. … While frustration with current economic conditions is understandable, our economy’s performance is nonetheless comprehensible, given what has befallen us over the last few years. Moreover, the reasons for more moderate growth suggest that further monetary stimulus is not likely to be of much help.”
Acknowledging it may seem “strange” to suggest rates will have to rise next year “when much of the chatter in financial markets is about the possibility of easier policy,” Lacker said. “In my view, it would be quite hard to justify additional monetary stimulus, absent a dramatic deterioration in economic conditions, which I do not view as likely.”
Home construction hasn’t rebounded as it has in past recession, making it “the most obvious factor holding back this recovery,” Lacker said. A glut of new homes were built during the boom, and many of those are unoccupied. Also mortgage standards have tightened. “A lengthy adjustment process in housing seems inevitable,” he said.
Consumer spending has been lower than in past recoveries, as households have chosen to pay down debt after suffering paper losses from the drop in home prices. Lacker noted high unemployment rates also stymied spending.
As in housing, where bright spots have emerged recently, so too job growth seems to have accelerated, despite fluctuations.
“Another impediment to growth cited by many observers is the array of changes in tax and regulatory policies, both actual and anticipated, that makes it difficult for businesses to evaluate the profitability of potential investment or hiring commitments,” he said.
The federal budget also causes uncertainty, as “significant adjustments” are needed. “Marginal tax rates may increase, the tax base may expand, benefits or entitlement programs may be cut, or other government programs may be reduced or eliminated. These changes could be far reaching and could affect a large part, if not all, of the population,” he said. Uncertainty whether the adjustments will impact them also suppress hiring and spending.
Business investment in equipment and software has been strong, as has the trade sector. Lacker said growth should gradually increase, although “impediments” will keep growth from levels. The situation in Europe remains problematic, with “further turbulence and a deeper recession” possible, which “could dampen growth” in the U.S.
Inflation “is reasonably good right now” and the price of gas is expected to decline, he said. The expectations for inflation ‘have remained well anchored within the range they have been in for several years,” which is a credit to the Fed, he said.
Returning to monetary policy, Lacker reminded that “forward guidance language is a forecast, … not an unconditional promise” and data will determine policy. However, he noted, easing policy now “is not the remedy. Monetary policy will not occupy vacant homes or give unemployed workers the skills to fill vacant jobs or reduce regulatory and fiscal uncertainty. Policy is already quite accommodative. Additional easing is unlikely to have much positive effect on growth prospects, but could well generate a sustained surge in inflation that would be costly to reverse.”
