–Might Have to Reevaluate Haircuts on Tsys at Discount Window
–If Infl Risks Appear, Have to Begin Exit Even if Growth Disappoints

By Heather Scott

CHANTILLY, Va (MNI) – Richmond Federal Reserve Bank President
Jeffrey Lacker said Thursday he is “cautiously optimistic” government
leaders will avoid a big “hassle” of defaulting on U.S. debt.

Responding to questions following a speech to the Dulles Regional
Chamber of Commerce, Lacker said the fighting over the debt limit is
taking attention away from the critical issue of the fiscal situation.

And he said the Fed might have to reevaluate the haircut on
Treasury securities imposed at the discount window.

“I don’t know if Aug. 2 is a precipice or not,” Lacker said in
response to a question.

“I remain cautiously optimistic that in the time remaining that our
leaders in Washington will find a way to avoid something that’s
eminently avoidable, and something that’s likely to be a very
significant hassle for a lot of our people in this country, namely
defaulting on Treasury payments.

“Unfortunately in the hue and cry here, the exigency of getting us
through Aug. 2 seems to be distracting people from the real question
here, which has to do with long-run fiscal sustainability,” something
that must be addressed, he said.

But asked by reporters about the more practical impact, Lacker
said, “We might need to reevaluate the discount window haircuts on
Treasury securities if that’s warranted.”

However, he said the Fed has “established policies and procedures
for setting haircuts on securities,” and any change would be done in
line with those rules.

Asked to elaborate on his views on inflation and the economic
outlook, Lacker said he is “comfortable” with the outlook which calls
for inflation to fall to about 2% later in the year, but repeated that
amid the recovery there is a “risk of step up in inflation trends.”

“If inflation risks materialize we would need to respond by
beginning the process of exit, even if growth remains disappointing,” he
told reporters.

The Fed will have to watch the data to see if the exit will have to
start before the end of the year, and referred to the last meeting
minutes by the policy-setting Federal Open Market Committee which said
the first step would be “not reinvesting proceeds of MBS.”

“For now okay with the stimulus we have in place but I think we’re
going to have to watch it carefully,” he said.

Lacker also said there is a “tremendous amount of uncertainty”
about what the full rate of employment is, and by his own estimate it
“could be very, very high, perhaps even close to unemployment rate we’re
seeing.”

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

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