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Lacker Says Fed Stimulus Could Lift Inflation, Not Growth

Federal Reserve Bank of Richmond President Jeffrey Lacker said additional monetary stimulus would likely raise inflation further while not providing a substantial lift to economic growth.

“Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth,” Lacker said in a speech before the Dulles Regional Chamber of Commerce in Chantilly, Virginia.

Federal Reserve policy makers meet Aug. 9 to assess the economy and monetary policy. U.S. central bankers have kept their benchmark lending rate in a range of zero to 0.25 percent since December 2008 and expanded the central bank’s balance sheet to $2.8 trillion in total assets in an effort to support growth.

The Fed’s Beige Book, a survey of regional economies released yesterday, said economic activity slowed in eight of 12 Fed districts. The recovery, which began in June 2009, has failed to pull the unemployment rate below 9 percent in all but two of the past 24 months of expansion. Lacker called the rebound in gross domestic product “disappointing” and said it remains to be seen if the economy rises to previous trend rates of around 3 percent annual growth or settles at a lower trend rate.

“When coming out of a recession, real GDP has typically grown several percentage points faster than the 3 percent long-run trend rate,” Lacker said. “This time, real GDP has risen at a 2.75 percent annual rate since the end of the recession.”

Third-Quarter Growth

Economists at firms such as Goldman Sachs Group Inc., JPMorgan Chase & Co, and Bank of America-Merrill Lynch cut estimates for third-quarter growth to an annualized rate of 2.5 percent, down from earlier projections of as much as 3.25 percent.

Orders for durable goods unexpectedly dropped in June, raising the risk of a slowdown in business investment in the second half of the year.

The economy expanded at a 1.8 percent annual rate in the April to June period, according to economists surveyed by Bloomberg News. The Commerce Department releases the second-quarter gross domestic product report tomorrow.

The Fed’s preferred near-term measure of inflation, the personal consumption expenditures price index, minus food and energy, rose 1.2 percent for the 12 months ending May. That’s below the FOMC’s longer-run preference range for the full index of 1.7 to 2 percent. Lacker said he expects inflation to average 2 percent over the coming year.

Download: Fed's Lacker Speaks, Economy, Inflation, Growth

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