WASHINGTON - Richmond Federal Reserve Bank President Jeffrey Lacker warned Friday of the risk of overestimating the extent to which economic slack and high unemployment will contain inflation pressures, and said policymakers must be ready to withdraw stimulus even before the economy reaches full employment.
Repeating his dissent on the Fed's policy-setting Federal Open Market Committee, and his view accommodation will have to be withdrawn by mid-2013 rather than late 2014, Lacker displayed a stark difference from Fed Chair Ben Bernanke who has repeatedly stressed that reversing course too soon could endanger the recovery.
In an interview with CNBC from the Richmond Fed's banking conference in Charlotte, Lacker, who is an FOMC voter, said he is optimistic about the state of the economy and the current outlook for inflation.
"I'm reasonably hopeful we're going to get good growth this year," Lacker said, repeating his forecast for 2%-3% growth for 2012 "and rising next year. It could get to 3% next year."
Lacker said, "The job market seems to be gradually healing. Business investment still seems to have a lot of momentum to it."
Meanwhile, inflation currently is not a problem: "We're in reasonably good shape right now. I'm expecting inflation to be around 2% in the next year or two," which is the new official FOMC target.
While energy prices going to push that higher next month or two, he expects the geopolitical concerns around the global oil market to last only a quarter or two.
But Lacker warned that "Inflation pressures can arise even if unemployment above 6% or 7%.
"I think in the past I've seen people overestimate the extent to which slack is going to depress inflation ... and we've plenty of experiences of inflation pressures arising despite reasonably elevated unemployment rates," he said.
And while Lacker agreed "you have to be cautious" about the job gains in the last few months, since they could prove temporary, "I've been heartened by the recent numbers. ...
"I think there is room for optimism," he said, and there is "a good chance of getting below 8% (unemployment) by 2013."
What that means for policy is that "We need to be prepared for the possibility that we need to start raising rates, withdrawing monetary stimulus ... before unemployment had gotten down to a place where we can call it full employment," Lacker said.
And while he acknowledged that "Further easing moves are something that are part of the arsenal, part of the toolkit and there are conditions one could conceive of under which you would pull them out and enact them," he stressed, "I think we're very far from that right now.
"If we get growth about what I'm expecting ... I don't see where the rationale for further easing is going to come from," Lacker said.
He repeated his rationale for dissenting on the language in the FOMC statement saying rates are likely to remain low through late 2014.
"I just disagree. My estimate is that economic conditions are likely to warrant low rates until sometime in the middle of next year. ... That's not a promise and neither is the committee statement. It's a forecast."
Refuting the concern -- which Bernanke has expressed repeatedly -- that tightening policy could derail the recovery, Lacker said, "If higher rates come about it will because of a stronger recovery. It won't be an obstacle to it."
"I thought the January meeting would be a great time to step away from keeping that calendar date in the language," and instead rely on the members' projections which give very rich view. "I thought that was the way we ought to communicate how long to keep interest rates low.
"If it's not a commitment, if it's a forecast, well then it ought to vary as the outlook varies, which means it could move like a trombone."
Asked about the frothy optimism in financial markets due to their belief in the possibility of another round of quantitative easing, as commentator Joe Kernen said traders are "like drug addicts" in regards to any Fed statement, Lacker responded sardonically: "I can't comment on drug use on Wall Street."
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