Fed’s Lacker Says QE Won’t Lift Growth While Posing Risk
Federal Reserve Bank of Richmond President Jeffrey Lacker voiced opposition to bond purchases by the Fed, saying the buying probably won’t spur growth beyond 2 percent while making an exit from stimulus more challenging.
“The benefit-cost trade-off associated with further monetary stimulus does not look promising,” Lacker said today in a speech in Richmond, Virginia. “The Fed seems to be unable to improve real growth, despite striving mightily over the last few years, and further increases in the size of our balance sheet raise the risks associated with the ‘exit process’ when it’s time to withdraw stimulus.”
The Federal Open Market Committee said this week it will keep buying $85 billion in bonds each month and may increase or reduce the pace depending on the outlook for inflation and the labor market. The Fed has expanded its balance sheet to $3.32 trillion with bond purchases aimed at spurring economic growth and bolstering employment.
Payrolls expanded by 165,000 workers last month and the unemployment rate fell to a four-year low of 7.5 percent, Labor Department figures showed today. Revisions added a total of 114,000 jobs to the employment count in February and March, showing employers are confident in the economic outlook in the face of federal budget cuts.
“The April employment report shows we are on track with the kind of labor market behavior we have been seeing over the last six months or so -- pretty steady gains at a pretty healthy pace,” Lacker said to reporters after his speech.
The labor market outlook has made “substantial improvement,” the threshold the Fed needs to reach to halt asset purchases, Lacker said in response to an audience question.
In light of the “broad sweep of the last four to six months” in job growth, “you ought to evaluate the likelihood of us reducing the pace of asset purchases accordingly,” he said.
Recent strength in the housing market bolsters the argument that the Fed should halt purchases of mortgage-backed securities to ensure the industry doesn’t overheat, Lacker said. He has opposed Feb buying of mortgage-backed securities as an inappropriate targeting of a single industry.
The U.S. faces little risk of disinflation, he said. “I see current low inflation rates most likely to be quite transitory,” and a shift in inflation expectations would flag any lasting change.
U.S. stocks rallied, with the Dow Jones Industrial Average reaching 15,000 for the first time. The Dow average climbed 1 percent to 14,983.33 at 2:35 p.m. in New York. Ten-year Treasury yields, which reached the lowest level of the year yesterday, jumped 0.12 percentage point to 1.75 percent.
Even with a buoyant stock market, growth “appears as if it’s limited, in large part, by structural factors that monetary policy is not capable of offsetting,” Lacker said in a speech to the Risk Management Association of Richmond. “This is why I do not support the current asset-purchase program.”
Lacker dissented at every meeting in 2012, saying Fed asset purchases probably wouldn’t help the economic expansion. He doesn’t hold a policy vote this year.
The Richmond Fed leader said inflation is likely to “edge back” toward the FOMC’s goal of 2 percent by next year and that measures of price expectations show households and financial markets are confident inflation will stay near its long-term average over time.
“The recent behavior of inflation has been heartening,” Lacker said. “Measures of inflation expectations remain within ranges consistent with price stability, and the low current readings on some inflation indices are likely to be transitory.”
“Well-contained inflation, the most fundamental contribution a central bank can make to economic growth, seems likely to continue,” he said.
Lacker said he sees several roadblocks for growth, including uncertainty over “unsustainable” fiscal policy, weakness in Europe and increased regulations that are hurting business plans for hiring and investment.
Some Fed officials, including Lacker and St. Louis Fed President James Bullard, said last month that a further decline in inflation that persisted might warrant additional stimulus. Consumer prices rose 1 percent in March from a year earlier, the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.
The economy expanded at a 2.5 percent annualized rate in the first quarter, the Commerce Department said last week. The gain followed a 0.4 percent fourth-quarter advance, and it trailed the 3 percent gain that was the median estimate of 86 economists surveyed by Bloomberg.
The economy will probably grow at about 2 percent for the foreseeable future, Lacker said.
Recent reports on retail sales, factory production and household spending have pointed to a slowdown in economic growth this quarter.
Lacker, 57, has been president of the Richmond Fed since 2004. He was previously the regional bank’s director of research. His district includes Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.
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