President of Federal Reserve Bank of Richmond, Jeffrey
Richmond Federal Reserve Bank President Jeffrey Lacker at a luncheon sponsored by the Roanoke Regional Chamber of Commerce Monday said that though the recession has bottomed, expansion has been disappointing. The real gross domestic product has grown at an average annual rate of 2.2 percent during the recovery while labor market conditions lagged. Four million jobs have been added but eight million were lost in the recession.
The most recent rate of job growth is fairly close to the average said Lacker. Unemployment is still high and the term “maximum employment” in the Fed’s congressional mandate should be thought of as the level of employment that currently can be achieved by the central bank. Monetary policy is simply unable to offset every friction in an economy.
“An unanticipated decline in residential construction resulted in an oversupply of labor and capital,” he said. Retraining is often required to absorb the pool of labor left behind. “The Key point here is that simply observing a high unemployment rate does not imply that the Fed’s monetary policy is failing to comply with its congressional mandate, nor does it necessarily mean that monetary policy needs to do more to achieve it goals.”
The first factor Lacker cited that was impeding a more rapid employment recovery included a large housing inventory and shrinkage in housing investment. Second was the difficulty in shifting housing related labor to other skills. Third, consumers have become more cautious and are “less willing to spend,” he said.
Lacker said the final impediment to hiring is uncertainty. The list of uncertainties that his business contacts emphasize includes the “fiscal cliff” and the combination of spending cuts and tax increases that will automatically occur next year if Congress fails to act. The effect of these sudden changes would move the country back into a recession.
“At some point Congress will have to align taxes and spending,” he said. The policy changes are likely to effect every American consumer or business. “Much of the recent sluggishness is understandable. Economies take time to recover from severe shocks.” Past recessions associated with housing slumps have acted the same. “What is exceptional is the depth of the contraction phase of this recession,” said Lacker.
Lacker thought that Europe’s recession would likely dissipate next year. He expects household confidence to slowly firm and bolster consumer spending. Recent months including Monday’s retail sales report of 1.1 percent growth was a good indication of increasing consumer confidence.
“The fundamental prospects for longer-term U.S. growth remains quite promising in my view,” said Lacker. He thought that the challenge in the long haul would be advancing people’s knowledge and skills. “Growing our human capital is fundamental to improving our standards of living,” he said.
The Fed’s responsibility “is to keep inflation low and stable.” The FOMC committed to price stability in its January statement that formalized a long-run goal for inflation of two percent. Lacker supported the statement but was the lone dissent at all six FOMC meetings this year.
He voted to leave the funds rate near zero but what Lacker objected to was the “forward guidance.” The language in the guidance stated that economic conditions are likely to warrant a federal funds rate near zero for at least several years. He believes that the statement would lead people to think the economy was weaker than they thought. “By itself, that could have a dampening effect on current activity, which is not what was intended.” He also thought it could be misinterpreted as a lack of commitment by the Fed to keep inflation at two percent. “I would vigorously oppose adopting such a stance and I do not believe my colleagues on the FOMC intended that interpretation either.”
Lacker believes the decision to purchase $40 billion in mortgage-backed securities (QE3) would yield little benefit. “It’s unlikely to improve growth without also causing an unwelcome increase in inflation,” he said. Buying MBS rather than Treasuries may reduce borrowing rates for conforming home mortgages, but if so, it will raise interest rates for other borrowers and thus distort credit flows. This is an inappropriate role for the Fed.” That is the role of Congress and the administration he explained.
Lacker said, “while I have objected to some specific monetary policy decisions, the fact that inflation has stayed around two percent is evidence that monetary policy has done reasonably well in recent years. Maintaining that record of success should be our focus in the years ahead.”
Posted By Valerie Garner
Categories: Business, Finance
Tags: budget, congress, economy