By Brai Odion-Esene

CHARLOTTESVILLE, Virginia (MNI) – Richmond Federal Reserve Bank President
Jeffrey Lacker Friday projected the U.S. economy to begin firming in the later
part of 2013, as the threat from Europe recedes and consumer spending gets a
boost from a jobs market that will continue to heal.

In a lunch-time speech at the University of Virginia’s, Lacker also
repeated his attack on the Fed’s recent monetary policy measures arguing that
the recent aggressive measures by the central bank do not address the core
factors impeding a labor market recovery.

Lacker is a voter on the Fed’s policymaking Federal Open Market Committee
this year, and has dissented at every meeting so far.

Giving his outlook for the economy, Lacker said: “My best guess is that
growth will begin to firm later next year and continue to improve beyond that.”

He said that as U.S. labor markets continue to heal, household confidence
should “slowly firm” and bolster consumer spending.

Lacker added that while the recession in Europe poses risks for this
outlook, “I think those risks will likely dissipate next year as leaders work
through the adjustments necessary for creating a new fiscal regime.”

Further out, Lacker also has a bullish outlook, declaring that “the
fundamental prospects for longer-term U.S. growth remain quite promising, in my
view, and are likely to reassert themselves in the years ahead.”

With regards to monetary policy, Lacker agreed that low interest rates are
needed in the current environment to keep inflation above the FOMC’s 2% target.

However, the FOMC’s declaration that conditions will likely warrant rates
remaining at exceptionally low levels until mid-2015 is “a highly imperfect way
to communicate about future policy.”

He warned that such language could be misinterpreted as suggesting a
“diminished commitment” on the part of the FOMC to its price stability mandate.

“I do not believe my colleagues on the FOMC intended that interpretation,”
he said.

As for the Fed’s decision to buy $40 billion in mortgage-backed securities
a month, Lacker said he believes the benefits of that action are likely to be
small as any boost in growth would be accompanied by a rise in inflation.

He pointed to factors holding back improvement in the labor market, with
housing the primary culprit.

While the sector has begun to show some “encouraging signs” he said, it is
still coping with a large inventory overhang.

Housing investment will continue to underperform, Lacker predicted, until
demand catches up with existing stock.

He also revisited the debate about structural vs. cyclical factors impeding
the labor market, arguing that due to the shift away from residential
construction, the skill profile of available workers “has meant that the
reallocation and skill mismatch frictions affecting labor markets are at a
relatively high level.”

“Finally, the political gridlock that has delayed remedies to our
unsustainable federal fiscal path has meant paralyzing uncertainty across the
vast range of fiscal policy touch points in the economy,” Lacker said.

–email: besene@mni-news.com

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