Federal Reserve Bank of Richmond president Jeffrey Lacker reiterated his preference yesterday for the Fed to drain reserves by disposing of securities on its balance sheet, and reasserted his position that asset sales are effective.

Speaking to reporters after unveiling a new “Fed Experience” exhibit at the Richmond Fed, Lacker said the term-deposit tests the central bank is conducting have gone “very well” from an operational standpoint.

“But the extent to which a term deposit is non-monetary is quite unclear,” Lacker said. “So it’s not obvious that term deposits would drain monetary liabilities from the financial system in a meaningful extent.”

Lacker made it clear to reporters that he believes the market has been overreacting to some data reports that came in below expectations. That is something to be expected in a choppy, moderately paced recovery, he said

“For me, the consideration of further easing is very far away,” Lacker said, adding that it would require a very substantial, unanticipated shock to the economy for the Fed to contemplate further easing.

Crafting and putting in place a sustainable fiscal plan for the United States would be more beneficial to the economic recovery than one predicated on fiscal imbalances, according to Lacker, who is considered an  inflation hawk.

Lacker described himself as “comfortable” with rates, when asked about the “extended period” language in the Federal Open Market Committee’s monetary policy statement.

“My feeling on rates will depend on how the data comes in and what I hear from my colleagues,” he said, noting that there is no discord among Fed officials about the path of monetary policy. “We all expect each other to bring our best independent judgment to bear, and I think that’s occurring just as much as it always has.”

When asked by Market News International if he believes the United States can implement a credible fiscal strategy without impeding the economic recovery, Lacker said there is no shortage of options for crafting a sustainable fiscal plan.

“It’s clear what’s been lacking has been the political ability,” he said.

It is very important to move in that direction soon, Lacker said, arguing that doing so would contribute positively to the recovery. “I think it would make the recovery a more healthy one than we would otherwise get.”

Lacker also told reporters that he does not expect a “dramatic” downturn in housing, which is a smaller part of the economy now.

“I think we can withstand some shocks,” he said.

— Market News International

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