Federal Reserve Bank of Richmond President Jeffrey Lacker said he opposes continuing asset purchases because they aren’t worth the risk, and that markets will remain volatile as policy makers debate how and when to curtail the program.
More purchases are unwarranted because the four-year economic expansion is being limited by structural factors beyond the Fed’s control, and continued growth in the balance sheet increases the risk associated with the eventual withdrawal of the stimulus, Lacker said today on a panel discussion in White Sulphur Springs, West Virginia.
“The benefit-cost trade-off for further monetary stimulus does not look promising,” Lacker, who doesn’t have a vote on monetary policy this year, said at a judicial conference held by the U.S. Court of Appeals for the Fourth Circuit. “I seriously doubt additional monetary stimulus can provide much impetus to real growth right now.”
Chairman Ben S. Bernanke told reporters last week the Federal Open Market Committee may taper $85 billion in monthly bond buying later this year and halt purchases around mid-2014 as long as the economy performs in line with Fed projections. Officials estimate the jobless rate, which was 7.6 percent in May, will fall to 7.2 percent to 7.3 percent by year-end.
“Over the course of the next 12 months, the committee will be reducing only the pace at which it is adding accommodation,” Lacker said. “The Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year.”
Global stocks and bonds retreated after Bernanke’s comments, with the yield on the benchmark 10-year Treasury rising as high as 2.66 percent this week, the highest since August 2011.
“As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely,” Lacker said. “This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented today.”
While low economic growth rates “are likely to persist for several years,” one of the biggest bright spots in the outlook has been in the housing market, Lacker said.
Housing activity “is finally on a solid growth path,” the reserve bank chief said. “The improvement in housing activity has bolstered the confidence of many households in the market value of their most important asset.”
Lacker, 57, dissented on FOMC decisions at all eight meetings last year and doesn’t vote again until 2015. He became president of the Richmond Fed in 2004 after five years as director of the regional bank’s research department.
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