By Steven K. Beckner

CHAPEL HILL (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker said Wednesday night that the Fed’s policymaking Federal Open
Market Committee will weigh the impact of the U.S. dollar’s value on the
domestic economy but doubted whether it will play a major role on the
FOMC’s monetary policy decision early next month.

Lacker made clear he doesn’t think at this time that renewed
quantitative easing is needed, but said he is keeping an “open mind”
pending the Nov. 2-3 FOMC meeting.

Lacker, speaking to reporters following a speech to a Richmond Fed
dinner for Research Triangle area business people, was asked by Market
News International whether the weakness of the dollar will or should
play a significant role in the FOMC’s decision about so-called “QE2.”

He replied that U.S. monetary policy “is directed at U.S. economic
conditions,” including “the purchase power (of the dollar) domestically
and domestic economic growth.”

“To the extent that the value of the dollar affects those
considerations it will factor into our thinking,” he went on, “but I
don’t think it should be more of a factor than it usually is”

The dollar exchange rate is just “one component of what the economy
is doing,” he added.

Asked whether the FOMC will worry about QE2 potentially aggravating
international exchange rate tensions and in turn damaging the U.S.
economy, Lacker said “that risk isn’t going to be a major factor
evaluating policy for me.”

Some have alleged that QE2 would be tantamount to a “competitive
devaluation” of the dollar by the Fed. Asked about that, Lacker said QE2
“might have an effect on the dollar,” but said the FOMC will need to
“evaluate (that impact) in light of domestic economic conditions.”

Asked by MNI whether the FOMC will be forced to launch QE2 to avoid
disappointing financial markets, Lacker commented, “We haven’t held the
meeting yet.” He said he and his colleagues must “churn through the
briefing books” and discuss policy options.

“I’m keeping an open mind on that,” he added.

“I expect my colleagues to do their best work and work hard to
figure out what to do,” he said.

Lacker recalled that “a few weeks ago I thought if the economic
growth and inflation numbers came in the way I expected them to I
probably would not support more easing.” And he indicated he has not
been surprised by the data.

Earlier, responding to audience questions, Lacker skirted direct
comment on the monetary policy issue of the day — whether or not the
Fed should pump more money into the economy by ramping up purchases of
government securities to lower long-term interest rates.

Lacker said he is waiting to see what his FOMC colleagues say and
what material the Fed staff presents Nov. 2-3, but he implied he would
not be supportive of QE2.

“This is new territory for us,” he said, adding that “we’re in a
very different circumstance now” than last year when the FOMC authorized
the first round of quantitative easing, totalling more than $1.7
trillion.

He acknowledged that the recovery is weak, but said he thinks
“inflation is at an appropriate level.”

Lacker said “uncertainty just gets compounded when you’re in
uncharted waters” and said it is hard to estimate the impact on yields
of “adding more money to the banking system.”

He said financial institutions will “have to be induced to hold”
securities at lower yields

“We’re really facing a situation where the effects are more
uncertain than usual,” he said.

Lacker said it is possible in some circumstances for Q.E. to have a
strong effect, but said it is “less certain it can ameliorate” current
problems, including a real estate overhang and business uncertainty
about taxes and regulations.

“That makes me hesitate,” he said.

But he added that the FOMC meeting is still “a few weeks away.” So
he said he will “wait until I see the briefing materials” and “listen to
colleagues before I make up my mind.”

** Market News International **

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