FRANKFURT (MNI) – It is a safe bet that the Federal Reserve’s next
move on interest rates will be a rise, but now is not the time for it,
Federal Reserve Bank of Richmond President Jeffrey Lacker said in an
interview published Thursday.

Despite current weak data, the Fed is nowhere near wanting or
needing to make additional asset purchases, Lacker told the Financial
Times.

He predicted growth in the US would continue, returning to the 3%
range, even though the recovery may be “choppy” and “uneven.” Lacker is
not a voting member of the Federal Open Market Committee this year.

On inflation, the central banker said the United States was in a
“reasonably good position” given recent firming in the core index. This
suggests inflation remaining in the 1.5-2% range for the remainder of
the year.

Asked whether the next move by the Fed would be tightening, Lacker
answered, “Yes, I think it is a safe bet.”

However, he added, “I’m comfortable with rates very low, the way
they are now. Just how long they stay there is a matter of conjecture;
it depends on how the data come in.”

“I’m going to be looking for a time when growth is strong enough
and well enough established that it will be clear that higher rates are
warranted,” Lacker said.

Addressing the issue of whether the Fed needs to buy long-term
assets such as mortgage-backed securities again, Lacker said that the
central bank is “far away from needing or wanting to do asset purchases
at this point.”

The Fed should revert to holding only treasuries as soon as
possible, the head of the Richmond Fed argued, since its holdings of
mortgage-backed securities risks pushing loans into housing,
disadvantaging other borrowers, including small businesses.

“I’d like to see us back away from tilting the playing field toward
housing,” he said.

Lacker said he could see “some advantages to reducing bank
reserves, draining bank reserves, reducing our balance sheet before we
raise interest rates.”

“The reason has to do with just the confidence we can have about
the effect of a change of interest rates on broader market interest
rates and on the economy as a whole,” he explained.

A double dip recession in the United States is “quite unlikely,”
Lacker insisted.

“It is important to keep in mind that earlier in the year we were
getting data that was better than expected,” he reminded.

“This is going to be a recovery that is going to be choppy [and]
uneven” Lacker warned. Still, “I’m expecting growth to continue. It is
important to remember that the economy still is expanding, despite the
slightly disappointing data that we’ve seen in the last few weeks.”

Asked about possible increased downside risks to growth, Lacker
conceded that there may now be a “notch higher risk of growth being for
a couple of quarters below trend,” but he insisted, “I do not think
that’s the most likely outcome. I still think we are heading back to
growth in the 3% range.”

The United States is in a “reasonably good place on inflation,”
Lacker underlined. “Core numbers have come in a bit firmer in the last
couple of months, which suggested that we’re gravitating toward
1.5%-2.0% for the remainder of the year, barring some unforeseen
shocks,” he underscored.

“And that’s consistent with the stability of inflation expectations
that we’ve seen throughout this period earlier this year when inflation
numbers were on the low side,” he elaborated.

Reiterating what he told reporters at a meeting in Richmond earlier
in the week, Lacker said that more fiscal stimulus in the United States
would not be appropriate. Rather, the country needs to focus on shoring
up its long-term financial stability. “I think that would be better for
growth than a short-term stimulus that expands the deficit.”

–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com

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