By Steven K. Beckner
CHAPEL HILL (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker stopped short of explicitly opposing further quantitative easing
Wednesday night, but said that the Fed will risk the “credibility” of
its long-term inflation objectives if it focuses too much on reducing
the unemployment rate.
Lacker, not a voting member of the Fed’s policymaking Federal Open
Market Committee this year, minimized the threat of deflation and,
indeed, said inflation is “now on target” as far as he is concerned at a
Richmond Fed-sponsored event.
He attributed sluggish economic growth not only to “overhangs” from
the housing boom and bust but also to great uncertainty about government
policy in a number of areas.
Lacker, in remarks prepared for delivery to business people from
the Research Triangle area of North Carolina, 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.
But he left no doubt where he stands.
“First things first: inflation is now on target, as far as I’m
concerned,” he said, noting that over the last 12 months the price index
for personal consumption expenditure (PCE) has risen 1.5% — “exactly
what I’ve been recommending for the last six years.”
He said the core PCE “is sending the same message, having risen by
1.4% over the last 12 months.”
“I believe that the Fed’s best contribution to our nation’s
economic prosperity over time would be to keep inflation stable near the
current 1.5% rate,” said Lacker.
He acknowledged that inflation has been lower than this at times
this year, but he said the longer term trend makes him “not yet
convinced that inflation is likely to remain undesirably low.”
“Moreover, the public’s expectation of future inflation is not at
such a low level,” he continued. “Indeed, the latest survey from the
University of Michigan puts the public’s short-run inflation expectation
at 2.2 percent.”
“So I do not see a material risk of deflation,” he added.
Lacker recalled that the U.S. has “experienced extended periods of
low inflation before without drifting into a deflationary spiral.” He
noted that the PCE inflation rate averaged 1.4% from January 1959
through December 1965 — never rising above 1.9% and never falling below
0.5%.
Yet this low inflation led not to deflation but to higher
inflation, he observed. “(N)ot only did this episode of around 1 1/2%
inflation not lead to deflation, it was actually followed by a gradual
upward drift that led into the Great Inflation of the 1970s, and
inflation ultimately exceeding 10%.”
Lacker said “the disastrous unraveling of price stability after
1965 provides an important cautionary tale” for the Fed.
“It is now widely recognized that tilting monetary policy toward
expanding employment gave policy a distinctly inflationary bias,” he
continued. “With inflation reasonably close to any plausible definition
of price stability, and all expectations measures pointing in the right
direction, making unemployment a policy imperative poses clear risks to
the credibility of our long run inflation goals.”
Lacker suggested that the Fed should not be overly concerned about
the slow pace of economic growth and job creation, saying there are
explanations for it not necessarily related to the level of interest
rates.
The recovery “has been more sluggish than many expected,” but
inspite of special forces restraining demand, he said “it is worth
bearing in mind that the economy IS growing.”
Because housing was “significantly overbuilt” there is a lingering
“overhang” of vacant houses, he said. And “even though home prices
appear to have stabilized, construction is likely to remain depressed
until growth in population and real incomes brings the demand for the
housing back in line with supply.”
He said “this is likely to take a good deal of time.” By contrast,
past recoveries were typically built in good part on housing.
Echoing other Fed officials, Lacker also blamed sluggish growth on
“pervasive uncertainty regarding an array of government policies.”
“There appears to be a broad feeling of apprehension that goes
beyond the normal grumbling about Washington or partisan political
opponents,” he said, citing “impassioned” complaints from businesses in
his fifth Fed district, which extends from Maryland through the
Carolinas.
“While it is hard to estimate the magnitude of the effects of these
fears, or to disentangle them from general expectations of weak demand
growth, they are too broad and deep for me to dismiss as implausible the
notion that they have significantly dampened consumer and business
spending of late,” he said.
Weak labor market conditions are “the predominant factor
restraining consumer spending in this recovery,” he said.
Notwithstanding these problems, Lacker said he found forecasts of
2% growth in the second half and somewhat faster growth next year
“reasonably likely.”
He said those forecasts could prove either too optimistic or too
pessimistic, but said “I believe the most likely outcome is for growth
to continue at the modest rate we have been seeing, and gradually
accelerating next year.”
** Market News International **
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