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Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy “has hit bottom” and a recovery is “solidly under way,” with housing and consumer purchases of autos no longer a drag on growth.
“The most likely outcome is that the economy will grow at a reasonable pace next year,” Lacker said in a speech today in Charlotte, North Carolina. Policy makers won't have any problem removing monetary stimulus, and instead face the challenge of determining “when and how rapidly” to do so, he said.
The central bank under Chairman Ben S. Bernanke has channeled more than $1 trillion into the financial system to end the deepest recession since the 1930s. Fed policy makers kept the benchmark interest rate in a range of zero to 0.25 percent after their Nov. 3-4 meeting, and Lacker's remarks today echoed their view that the economy remains constrained by job losses and sluggish income growth.
“I do agree that the national economy has hit bottom and that a recovery is solidly under way,” the regional bank chief said to a gathering of the Charlotte Chamber of Commerce.
Still, an “extremely weak labor market” requires monitoring and rising losses and delinquencies in the commercial real estate market also pose a challenge, he said.
U.S. companies cut an estimated 169,000 jobs in November, according to data from ADP Employer Services released today, indicating unemployment is probably rising. The jobless rate soared to a 26-year high of 10.2 percent in October.
Presidents Predict
Fed governors and regional bank presidents predicted the unemployment rate will range from 9.3 percent to 9.7 percent in next year's fourth quarter, down from their June projection of 9.5 percent to 9.8 percent, according to minutes of the Federal Open Market Committee's November meeting released last week.
The central bank, when deciding when to tighten policy, will look at “a broad range of indicators, how strong the recovery is,” Lacker told reporters after the speech.
The revival in economic growth needs to be “well enough established that looking forward it is clear we need real interest rates to be higher,” he said. “It has got to be a forward-looking assessment.”
Policy makers raised their forecast for 2010 economic growth, to a range of 2.5 percent to 3.5 percent from 2.1 percent to 3.3 percent. The median 2010 projection for the Fed's preferred inflation gauge, which excludes food and energy costs, was unchanged in a range of 1 percent to 1.5 percent.
Inflation ‘Ideal'
Inflation is at an “ideal” level and the risk of a substantial reduction in prices has declined, Lacker said.
“We do have the tools to remove as much monetary stimulus as necessary to keep inflation low and stable,” he said. “There is no doubt that we must be aware of the danger of aborting a weak, uneven recovery if we tighten too soon. But if we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery.”
Lacker said he would prefer to curtail bank reserves through the sale of assets.
“When we get to the point where we feel like we need to reduce bank reserves, we will have a number of options to choose from,” he said to reporters.
"The natural place to start is asset sales,” he said. "It is the one, to my mind, that we are the most sure that it would bring about a reduction in our monetary liabilities.”
In the third quarter, the economy expanded at a 2.8 percent annual pace after a yearlong contraction.
Lacker, 54, votes on FOMC interest-rate decisions this year. He dissented from an FOMC decision in January, indicating a preference to expand the “monetary base” by purchasing “Treasuries rather than through targeted credit programs.” In 2006, Lacker dissented four times in favor of higher rates.
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