Tags: Fed | Lacker | Threats | Economy

Fed’s Lacker: Threats to Economy Worse Than Thought

Thursday, 12 January 2012 09:57 AM

The U.S. economy will grow this year but threats to its recovery such as the European debt crisis, unemployment and a weak housing sector are worse than once thought, says Federal Reserve Bank of Richmond President Jeffrey Lacker.

Lacker, an inflation hawk who becomes a voting member of the Fed's monetary policy committee this year, says GDP will grow between 2 percent 2.5 percent this year.

"I think we'll make more progress on unemployment, but it's likely to be slow," Lacker tells CNBC. "We're seeing a decline in participation" as frustrated job seekers drop out of the labor force.

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When that happens, unemployment rates fall numerically and often mask the true severity of the nation's jobless situation, as fewer people out looking for work means fewer people can be classified technically as unemployed.

Housing will also drag on the economy, and so will Europe, not because U.S. banks are directly exposed to the debt crisis there but because money market mutual funds have invested in Europe's short-term debt securities, making them vulnerable to banks in Europe that are directly exposed to the crisis.

"The major vulnerability of our financial system has to do with involvement of money market funds. Until we fix the structure there, we're vulnerable to flights," Lacker says.

Europe remains mired in fear and uncertainty as policymakers work to keep countries like Greece from defaulting, which would send shockwaves across global financial systems.

A Reuters poll of economists finds that the worst is yet to come for the continent but most believe the currency zone will survive.

The poll finds that nine out of 64 economists feel the bloc has finally turned the corner of the crisis, with the majority feeling otherwise, but only 10 says the eurozone would not survive the year in its current form.
Greece remains the most pressing risk.

"All eyes are still on Greece. The situation looks extraordinarily bleak. The household sector is getting hammered ... the banking sector is getting pummeled to pieces," says James Nixon at Societe Generale, according to Reuters.

"But if someone keeps writing the checks Greece will survive."

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Thursday, 12 January 2012 09:57 AM
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