–Now Only ‘Marginally Comfortable With ‘Extended Period’ Language

By Brai Odion-Esene

WASHINGTON (MNI) – Richmond Federal Reserve President Jeffrey
Lacker Wednesday maintained his argument that the Fed selling the assets
on its balance sheet before hiking interest rates is a viable strategy,
while voicing his now “marginal” comfort with the “extended period”
stance of the Federal Open Market Committee.

Lacker told reporters following a speech that there are advantages
to normalizing the Fed’s balance sheet earlier rather than later, noting
while the Fed’s MBS holdings continues to skew credit towards the
housing sector, the market has stabilized — although at a low level —
and he expects that to continue.

“I think that’s a legitimate option,” he said regarding the idea of
selling assets first.

“My preference for normalizing our balance sheet with more alacrity
comes from wanting to reduce that distortion, to the extent that it
exists, sooner rather than later.”

“We should avoid sparking another housing boom,” he said.

Lacker said he remains “reasonably” bullish on the outlook got the
U.S. economy, but predicted that over the course of the recovery
inflation risks will shift towards the upside in the next couple of
years.

So will he align himself at some point with Kansas City Fed
President Thomas Hoenig — currently the lone dissenter on the Federal
Open Market Committee?

“A couple of weeks ago I was still comfortable with that language;
decreasingly so — that’s where I am now,” Lacker said. “Just sort of
marginally comfortable with that language at this point.

Although there have been excess reserves held of the Fed’s balance
sheets for a while, the expected rise in inflation has not occured.
Lacker said this is because the additional supply of bank reserves “is
satisying a very elevated demand for liquid reserves.”

“Because of that the inflationary implications have been, so far,
minimal. But we will need to be very careful going forward.”

With crude oil prices coming down, Lacker projected low overall
inflatino numbers for the next couple of months. “I think its going to
tend to be drawn back to about 1.5% for the remainder of the year.”

Asked if the ongoing debt crisis in Europe has influenced his
outlook for U.S. growth, Lacker said his expectations have not changed
“a lot.”

He warned that there are some risks now in the U.S. outlook that
were not there before, predicting the crisis will hit demand for U.S.
exports and so “shave a tenth or two off growth” in 2010.

Asked about the risk of re-opening the dollar swap lines at a low
rate, Lacker said, “I don’t think the European banking system has
addressed sub-prime related losses as rapidly as the U.S. banking system
has.”

This has resulted in an overhang of the dollar funding problem with
a lot of their institutions, he said. The swaplines allow the European
Central Bank to address that.

Lacker said he is not concerned — from a supervisory point of view
— about the possible impact on U.S. banks from the EU crisis, as they
are much less exposed compared to their European counterparts.

Lacker spoke in favor of plans by Congress to restrict the Fed’s
13(3) emergency lending authority, saying shifting credit policy towards
the U.S. Treasury and Federal Insurance Deposit Corp. “is a good thing.”

That is a way to focus the Fed more on monetary policy, he said. It
also limits the extent to which “we have to make very political
sensitive credit allocation decisions.”

** Market News International Washington Bureau: 202-371-2121 **

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