Fed's Lacker Less Comfortable with 'Extended Period'

Thursday, 27 May 2010 08:28 AM

A top Federal Reserve official said on Wednesday he was beginning to reconsider whether the central bank's vow to keep interest rates low for an "extended period" is still appropriate as the U.S. economy recovers.

"A couple of weeks ago, I was still comfortable with that language. Decreasingly so," Jeffrey Lacker, president of the Richmond Fed, said.

Lacker downplayed the potential impact of Europe's debt crisis on U.S. growth, saying he still expected the economy to expand around 3 percent this year.

"What's going on in Europe hasn't changed my outlook a lot," Lacker told reporters following a speech before the Institute for International Economic Policy. "There are some risks now in the outlook that weren't there before."

European nations are engulfed in what many see as a second phase of the global credit crisis, as investors worry about the heavy debt load of countries like Greece, Spain and Portugal.

But Lacker, who is not a voter this year on the Fed's rate-setting Federal Open Market Committee, argued that despite a notable recent spike in the cost of borrowing between banks, the U.S. recovery remains on a solid footing. Europe's travails could, however, shave about 0.1-0.2 percentage point from U.S. gross domestic product, he said.

The continent's turmoil has taken a heavy toll not only on the euro, which plumbed new four-year lows this week, but also on stock prices around the world. U.S. share prices are down over 12 percent in just the last month.

Lacker, a monetary hawk inclined to raise interest rates sooner rather than later to curb inflation, said he expects U.S. inflation to remain low over the next couple of months given a sharp drop in commodity and oil prices. But he said the consumer price index, which in April fell 0.1 percent, should gravitate back toward a range between 1.5 percent and 2 percent as the year progresses.

In response to the credit meltdown of 2007-2009 and the ensuing recession, the Fed slashed interest rates to near zero percent and undertook a host of emergency measures to try to revive lending, including large-scale purchases of Treasury and mortgage debt.

Lacker said he viewed selling some assets before raising interest rates as a "legitimate" policy option that would help reverse the perception that the Fed is favoring housing over other sectors of the economy.

"We should avoid sparking another housing boom in this recovery," he said.

Renewed strains in interbank lending related to worries about European sovereign debt are expected to delay any monetary tightening by the U.S. central bank until at least next year.

Lacker, in a speech focused primarily on supervision and regulation, said the U.S. government's implicit backing of the banking sector, not a lack of adequate rules, fueled the financial crisis.

"The incentives created by the financial safety net were the chief cause of the crisis," he said. "The problem prior to the crisis was not solely or even primarily insufficient regulation."

The comments came as Congress debates legislation to overhaul financial regulation. The proposed reforms, the most sweeping since the 1930s, aim to dampening some of the banking sector's riskiest practices but would do little to alter the immediate perception that several very large institutions would never be allowed to go down.

© 2019 Thomson/Reuters. All rights reserved.

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A top Federal Reserve official said on Wednesday he was beginning to reconsider whether the central bank's vow to keep interest rates low for an extended period is still appropriate as the U.S. economy recovers. A couple of weeks ago, I was still comfortable with that...
Thursday, 27 May 2010 08:28 AM
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