Tags: Fed | Lacker | Markets | Overreact | Data

Fed's Lacker: Markets Overreacting to Weak Economic Data

Monday, 12 Jul 2010 01:59 PM

The economy remains on track for firm growth and investors should not worry too much just because a few reports have been weaker than forecast, Richmond Federal Reserve Bank President Jeffrey Lacker said on Monday.

A soft batch of economic data, including anemic hiring and battered consumer confidence, have raised concerns the recovery might be cut short.

But Lacker, a known inflation hawk, said he was not greatly concerned, adding that Europe's debt troubles would not have a great impact on the U.S. outlook.

"Market participants seem to be overreacting to a couple of reports that have been a little bit below what people expected," he told reporters after the launch of the "Fed Experience" exhibit at the Richmond, Va., Fed.

"What I've seen in the data reports isn't inconsistent with a moderately paced recovery," said Lacker, who is not a voter this year on the Fed's policy-setting Federal Open Market Committee.

In that context, Lacker suggested that market speculation that the central bank might need to take further steps to ease borrowing costs even further — even though interest rates are already effectively zero — is quite premature.

"For me, consideration of further easing steps now is very far away," he said. "It would take a very substantial, unanticipated adverse shock."

Asked if he was concerned about a double-dip in housing, which was at the epicenter of the biggest financial crisis in modern U.S. history, Lacker said the sector's shrinkage means it now plays less of a role in overall activity.

He noted a downturn in sales and construction following the expiration of a home-buying tax credit, but added he does not see a dramatic worsening from current levels.

In response to the financial turmoil that began in the summer of 2007, the Fed cut interest rates sharply to their current zero to 0.25 percent range. It also undertook an array of emergency steps aimed at soothing ailing credit markets, including massive purchases of mortgage and Treasury bonds.

Lacker argued that the extent of such actions was such that small reserve draining operations, such as the "term deposits" the Fed has been testing recently, would not do the trick when the central bank decides to pull back.

Instead, he favors outright sales of assets, a view that puts him at odds with some of his colleagues on the Fed's Washington-based board.

"It's not clear the term deposit is going to meaningfully tighten monetary conditions," he said. "Asset sales are the proven, effective way, to drain reserves."

On the fiscal side, Lacker said a credible plan for reducing the budget deficit would aid rather than hinder the economy's rebound.

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The economy remains on track for firm growth and investors should not worry too much just because a few reports have been weaker than forecast, Richmond Federal Reserve Bank President Jeffrey Lacker said on Monday. A soft batch of economic data, including anemic hiring and...
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