Safe you Finance

Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy will probably expand at “a reasonable pace” this year on growth in spending by households and businesses.

“Housing should continue to recover from a very depressed state, consumers should gradually expand spending, business investment should make something of a comeback,” Lacker said today in remarks to the Maryland Bankers Association in Linthicum, Maryland. Even with a resumption in growth, “the level of economic activity will disappoint many people for quite some time,” he added.

Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent since December 2008 to revive lending and end the worst recession since the Great Depression.

Policy makers will need to “choose carefully when and how rapidly” to remove monetary stimulus, Lacker said without indicating his own views on the timing.

The risk of a “pronounced” reduction in inflation has diminished, Lacker said.

“During the recovery period ahead we may face an increasing risk of inflation edging upward, which has sometimes occurred during past recoveries,” he said. “While that risk appears to be minimal at this point, we will have to be careful as the recovery unfolds to keep inflation and inflation expectations from drifting around.”

Not Strong Enough

Growth hasn’t been strong enough to reduce the unemployment rate. The U.S. lost 85,000 jobs in December after revisions showed payrolls increased the prior month for the first time in almost two years, a report today from the Labor Department showed. The jobless rate held at 10 percent.

The U.S. Congress has mandated that the Fed pursue low inflation and full employment. The 7.2 million drop in payrolls over the past two years has been the biggest decline as a percentage of total jobs since the end of World War II.

“The labor market could conceivably recover more slowly than many expect, which would restrain consumer spending and dampen growth,” Lacker said. “But household incomes and household confidence could conceivably rebound more vigorously than many expect, in which case consumer spending could expand more briskly.”

Services Expanded

Service industries expanded in December, with the Institute of Supply Management’s index of non-manufacturing businesses rising to 50.1 percent from 48.7 percent in November. Manufacturing last month expanded at the fastest pace in more than three years, the ISM said in a separate report.

The economy probably expanded at a 4 percent annual rate in the fourth quarter, according to a Bloomberg News survey.

Federal Open Market Committee members maintained an outlook for “moderate growth and subdued inflation” in 2010, minutes of their Dec easy online payday loans. 15-16 meeting showed. “A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually,” the minutes said.

The U.S. central bank’s efforts to restore liquidity and credit have resulted in the expansion of its balance sheet to $2.24 trillion in total assets, up from $858 billion at the start of 2007. As a result of the Fed’s direct purchases of $1.7 trillion in mortgage-backed, federal agency, and Treasury bonds, banks now hold more than $1 trillion in reserves in excess of what they are required to hold against deposits.

No ‘Huge’ Increase

Lacker said he doesn’t expect the conclusion of Fed purchases of mortgage-backed securities scheduled for the end of March to lead to a “huge” increase in mortgage rates.

Central bankers are now discussing how they will eventually exit their low-rate policy and drain excess cash in the banking system to head off inflation. The timing of such moves depends on economic performance, the minutes showed.

“A few members” suggested “it might become desirable” to expand the scale of asset purchases and continue them beyond the first quarter if the outlook for growth weakened or mortgage markets deteriorated, the minutes said. One member thought the purchases could be scaled back, and said it “might become appropriate” to begin selling assets if the recovery “gains strength over time,” the minutes said.

Banks haven’t started to circulate their reserves into expanding credit. Loans and leases of commercial banks in the U.S. declined to $6.8 trillion in November from $7.2 trillion a year earlier, according to Fed data.

Criticism of Policy

Proposed congressional audits of monetary policy would lead to criticism of decisions to increase the benchmark interest rate, Lacker said to reporters. The House voted last month to approve a proposal by Representative Ron Paul, a Republican from Texas, to end a ban on audits of monetary policy over Bernanke’s warnings the measure threatens to compromise Fed independence.

“The kind of audits of recent monetary policy decisions that the Paul amendment would allow are almost certainly going to result in criticism of interest rate increases,” Lacker said. “They are going to be biased in one way.”

The central bank hasn’t “settled on an approach” on how its various tools will be used with the federal funds rate, he said. “One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that.”

Source