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Duke, Lacker Say Fed Has No Plans for Further Monetary Easing

Governor of the U.S. Federal Reserve Elizabeth Duke
Elizabeth Duke, governor of the U.S. Federal Reserve. Photographer: Jim R. Bounds/Bloomberg

Two Federal Reserve officials said the central bank has no plans to deploy additional tools for stimulating the economy and that the recovery is intact.

Fed Governor Elizabeth Duke, asked about possible additional steps that could be taken to bolster growth, said in an interview in Washington that “there are no plans to do that at this point.” Richmond Fed President Jeffrey Lacker said “Consideration of additional easing steps is very far away.”

Their comments echoed remarks last week by the Dallas Fed’s Richard Fisher and Kansas City’s Thomas Hoenig, who said more stimulus isn’t needed even after reports that private payrolls in June grew less than anticipated and manufacturing cooled. Princeton University economist Paul Krugman is among those saying the Fed must do more, warning that the nation is in danger of succumbing to a “deflationary trap.”

“It would take a very substantial, unanticipated adverse shock” for further steps to be appropriate, Lacker, 54, said. “Consideration of further easing steps is very far away.”

The Fed has several tools it could use to loosen monetary policy even after it slashed rates to zero in December 2008 and more than doubled its balance sheet to $2.34 trillion, Duke said. It could alter its communication strategy, lower the interest rate it pays on excess reserves or replace mortgage-backed securities that are rolling off its balance sheet, she said.

Even so, “I think we are in the right place” on monetary policy. “There are a lot of reserves out there in the system,” she said in a Bloomberg Television interview. “We don’t think the barrier is there’s not enough money out there.”

‘Tight Credit’

Fed Chairman Ben S. Bernanke and fellow policy makers last month affirmed a pledge to hold the benchmark interest rate close to zero for an “extended period” and said “tight credit” is restraining consumer spending.

“I’m comfortable with rates where they are now,” Lacker, who doesn’t vote on rate decisions this year, told reporters at the opening of an exhibit at the Richmond Fed on the history of the central bank. “You have some surges, some slower periods. It’s just going to be a choppy recovery. To my mind, what I’ve seen in the data reports aren’t inconsistent with a moderately paced recovery over time.”

Duke said “We are seeing moderate growth, we are seeing subdued inflation.”

Treasuries were little changed, with the yield on the 10-year note rising to 3.07 percent at 5:15 p.m. in New York from 3.05 percent late yesterday. Stocks rose for a fifth day on optimism about the outlook for corporate earnings, pushing the Standard & Poor’s 500 Index up 0.1 percent to 1,078.75.

Small Business Lending

Bernanke, speaking today at a Fed-hosted conference in Washington on small-business lending where Duke also appeared, said small firms are having a tough time getting the loans they need to expand or stay afloat and keep the U.S. recovery going.

“Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges,” said Bernanke, 56. “Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers.”

Investors’ expectations for a Fed rate increase have fallen since the June meeting of policy makers. Investors are discounting about 31 basis points of tightening over the next 12 months, a decline from about 42 basis points on June 22, the first day of a two-day Fed meeting, according to data calculated by Credit Suisse using the overnight index swap curve.

Growth Outlook

Growth in the world’s largest economy will average 2.8 percent from the current quarter through the second quarter of 2011, according to the median estimate of 52 economists surveyed by Bloomberg News from July 1 to July 8, down 0.1 percentage point from last month.

“I think what’s been happening is some market participants are over reacting to a couple of reports that have been a little bit below what people expected,” Lacker said. “We had some reports better than expected a couple of months ago. I think this is going to be a recovery that’s like that over time.”

The Labor Department reported this month that private employers added 83,000 jobs in June, less than the 110,000 forecast in a Bloomberg News survey of economists. Homebuilders started building dwellings at the slowest pace of the year in May, after the expiration of a housing tax credit. Housing starts fell 10 percent in May to a 593,000 annual pace.

‘Doing Damage’

“I don’t expect a dramatic worsening” in housing, Lacker said. “Housing is such a small portion of the economy now it’s a little less capable of doing damage. I think we can withstand some shocks to housing and some fluctuations to housing.”

Lacker said he expects the rate of inflation to begin to increase toward the end of 2010.

“At the beginning of the year we were getting some low inflation numbers, but inflation expectation measures remained pretty stable,” Lacker said.

“Lately the core inflation numbers have firmed up a bit. I think what we’re most likely to see is inflation gravitating back to the 1.5 to 2 percent range,” Lacker said, adding that the risk of deflation, or a broad-based decline in prices, is low.

Lacker said he is skeptical the Fed’s Term Deposit Facility will be an effective tool for removing more than $1 trillion in excess reserves in the banking system. The Fed has held two tests of the program, which is analogous to a certificate of deposit, and will announce the results of a third test tomorrow.

“It’s not clear a term deposit facility is going to really meaningfully tighten monetary conditions,” Lacker said. “Asset sales are the proven effective way to drain reserves, to drain monetary assets.”

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