–Retransmitting Extensively Updated Story Published 14:54 ET Monday

By Steven K. Beckner

CHARLOTTE, N.C. (MNI) – Richmond Federal Reserve Bank President
Jeffrey Lacker made abundantly clear Monday that he is not prepared to
support further easing of monetary policy, at least as long as the
economy maintains its meager projected growth pace and inflation stays
at the top of the Fed’s target range.

Lacker, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee in 2012, was asked by MNI under what
conditions he would support further easing.

He did not totally rule out doing so as he met with reporters
following a speech to the Charlotte Chamber of Commerce, saying that
“everything is going to depend on the data going forward” and that he
did not want to prescribe any rules for what the FOMC should do.

However, Lacker added, “if growth stays about where it is now, 2%
or above and inflation runs around 2%, I’m hard-pressed to see any
rationale for further easing.”

Earlier, in prepared remarks, Lacker had warned Monday that the Fed
cannot hope to spur stronger economic growth or reduce unemployment
through additional monetary stimulus without running the risk of causing
accelerated inflation.

“The macroeconomic experience of 2011 provides vivid illustration,”
he said. “Despite large-scale efforts to provide more monetary stimulus,
growth has disappointed and inflation has ratcheted upward,” he
continued. “Growth is governed predominantly by nonmonetary phenomena,
which implies that monetary stimulus can at times move inflation more
than employment.”

Lacker added that “a central bank’s ability to elevate its
economy’s growth rate over a sustained period, while preserving price
stability, is quite limited.”

Lacker told reporters he continues to be supportive of a change in
the FOMC’s communication strategy toward being more explicit about the
Fed’s inflation objective, but did not go beyond that.

He said he was “very comfortable” with the FOMC’s policy statement
last week, which reflected rising concern about spillover effects from
the European debt crisis.

Lacker said “recent economic news in the U.S. has been positive for
a couple of months” and said this is “going to be a good quarter.”

But “at the same time, prospects for growth in Europe have been
deteriorating,” he went on, and “that has to mean that you revise your
outlook for U.S. exports and their contribution to U.S. growth.”

“I was very comfortable with the tone,” he repeated.

Acting as an alternate on Nov. 30, Lacker voted against lowering
the borrowing rate on dollar swap lines with other central banks by 50
basis points.

He explained that not only did he see no justification for cutting
the swap rate below the Fed’s primary discount rate, but he thinks the
Fed should “stay out of the foreign exchange market.”

And he reiterated his long-standing position that the Fed should
buy only Treasury securities, not other assets such as mortgage-backed
securities, calling the latter credit allocation.

“I didn’t see a rationale for making the interest rate lower than
the rate we charge on primary discount loans,” Lacker said of his
dissent.

Besides, he added, “there isn’t really any need for us to do
that,” i.e. enter into swaps with foreign central banks. He said the
Fed can always “borrow swiss francs or euros to lend to our banks” if
necessary.

But Lacker made a broader case for drawing strict limits on Fed
lending activities and asset purchases, lest it become enmeshed in
politically ticklish “fiscal policy.”

“Any given increase in the balance sheet can be accomplished via
acquiring U.S. Treasury securities or acquiring some other assets, some
other IOU,” he said, adding that the Richmond Fed has long taken the
position that “the Fed can do a perfectly sufficient job of supplying
liquidity to a market buying just Treasuries.”

“If it does anything but buy treasuries, it’s undertaking fiscal
policy,” Lacker said. “It’s in essence selling Treasuries to the public
and then lending the proceeds to somebody. It’s really credit allocation
and fiscal policy, and that’s not something the central bank ought to
do.”

“It ought to stay out of it,” he continued. “And I think the storm
of criticism surrounding the fed since 2008 is evidence that what
(former Richmond Fed President) Al Broaddus and (former research
director) Marvin Goodfriend were arguing was very legitimate.”

Broaddus and Goodfriend wrote essays arguing that the Fed should
buy only Treasuries and stay out of foreign exchange operations.

“And the same goes for domestic lending,” said Lacker. “That’s
channelling taxpayer funds or funds raised by issuing taxpayer
obligations — funnelling those to private market participants. And I
think that…when they do they wade into political controversies that
can compromise their ability to do monetary policiy — their
independence.”

Lacker talked to reporters following presentations by major
corporate executives from Charlotte-based corporations. They were almost
uniformly gloomy about the economic outlook.

Wells Fargo executive David Carroll said he does not expect a
“double dip” recession but did anticipate sluggish growth. He was echoed
by Bank of America CEO Brian Moynihan.

Nuchor Chairman and CEO Daniel DiMicco foresaw “more of the same in
terms of slow growth and uncertainty.” He blamed “excessive
regulation,” a point echoed by Lacker.

With the economy growing between 1% and 2%, DiMicco said, “we might
find ourselves in recession again,” and job growth will far short of
what is needed. He said 360,l00 to 400,000 jobs per month are needed
over the next 5 years to get unemployment down to 6% — far more
than it has been averaging.

“More and more young people coming into the labor market with no
place to go,” said DiMicco, who said the true unemployment rate is
“really more like 20%.”

** Market News International **

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