Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. may already be close to maximum employment from a monetary policy standpoint and that policy makers can’t do much more to cut the jobless rate.
“Given what’s happened to this economy, I think we’re pretty close to maximum employment right now,” Lacker said today in a Bloomberg radio interview on “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “That might be shocking. That might be surprising.”
Fed policy makers believe the U.S. central bank has limited control over the jobless rate because the employment level is driven by “non-monetary factors that affect the structure and dynamics of the labor market,” according to the January statement from the Federal Open Market Committee. The jobless rate was unchanged at 8.2 percent in June.
Lacker, who has dissented from all four FOMC decisions this year, is at odds with colleagues on what the Fed should do to boost the economy. He said in a June 22 statement that he opposed the FOMC’s $267 billion extension of its Operation Twist program because it may spur inflation and won’t give the economy a significant boost.
San Francisco Fed President John Williams said today the U.S. central bank must maintain “extraordinary vigilance” to see if the slowing economy requires additional monetary stimulus. “If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a speech in Coeur D’Alene, Idaho.
“From the point of view of monetary policy, employment is close to maximum right now,” Lacker said in the Bloomberg radio interview. “Is it an ideal world? Should we be happy with it? No. But I don’t think there’s much that monetary policy ought to be thought of as doing about it.”
Fed officials in June forecast the jobless rate will average 8 percent to 8.2 percent in the fourth quarter of this year. The unemployment forecasts centered around 7.5 percent to 8 percent in the fourth quarter of next year and 7 percent to 7.7 percent in late 2014.
The reserve bank chief also said that “some of the slowdown is real” for the U.S. economy though the reduction in growth isn’t severe enough to tip the economy back into a recession. “We’re just in a situation where growth is going to fluctuate between somewhat satisfactory and disappointing,” Lacker, 56, said in today’s interview.
“The numbers have been pretty tepid, we’re definitely experiencing a slowdown,” Lacker said. “I don’t think this is fatal. I don’t think this is pushing us back into a recession right now.”
Lacker has said the Fed will probably have to raise rates in mid-2013, contradicting the FOMC’s statements this year that economic conditions will probably warrant “exceptionally low” levels of the federal funds rate at least through late 2014. U.S. central bankers cut the benchmark lending rate to a record-low range of zero to 0.25 percent in December 2008.
A weaker-than-forecast June jobs gain in the U.S. will lead the Fed to keep its benchmark interest rate at almost zero until the middle of 2015, according to reports from Goldman Sachs Group Inc. and Bank of America Corp., two of the 21 primary dealers that trade directly with the central bank.
Lacker said the Fed’s late-2014 projection “is a forecast,” and not a promise.
“If I had to choose today, I’d say it may be late 2013,” Lacker said. “It’s more likely we’re going to need to move a little later in 2013, but it could come sooner.”
Fed officials on June 20 lowered their forecasts for growth and employment while noting “significant downside risks” to the economy. Policy makers reduced their so-called central tendency estimate for 2012 gross domestic product growth to 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April. Estimates for 2013 centered around 2.2 percent to 2.8 percent, compared with 2.7 percent to 3.1 percent in the previous forecast.
The central tendency forecasts exclude the three highest and three lowest estimates.
Lacker said in an April 4 Bloomberg Television interview that growth will probably accelerate to above 3 percent next year, warranting a boost in the benchmark interest rate. Economists estimate that GDP will increase by 2.2 percent this year and 2.4 percent next year, according to the median of 70 estimates in a Bloomberg survey.
American employers added fewer workers to payrolls than forecast in June, and the jobless rate stayed at 8.2 percent as the economic outlook dimmed.
The Fed releases minutes of the June meeting on July 11. The next FOMC meeting is set for Aug. 1 in Washington.
Lacker has been president of the Richmond Fed since 2004 and is the second-longest serving among all 12 regional bank presidents after Cleveland’s Sandra Pianalto. He votes on monetary policy in 2012 as part of the rotation among Fed bank presidents.