Any Consideration of Easing ‘Very’ Remote

Lacker Says Any Consideration of Easing ‘Very’ Remote (Update3)

By Joshua Zumbrun

July 12 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said any consideration of further monetary easing by U.S. central bankers “is very far away.”

“It would take a very substantial, unanticipated adverse shock” for further steps at stimulus to be appropriate, Lacker told reporters today in Richmond. “Consideration of further easing steps is very far away.”

Economists pushed back their forecasts for an interest-rate increase after reports showed private payrolls in June grew less than anticipated and manufacturing cooled. Paul Krugman, the Nobel-prize winning Princeton University economist, wrote in a column in the New York Times today that the Fed should be “doing all it can do” to prevent deflation.

Fed Chairman Ben S. Bernanke and fellow policy makers last month affirmed a pledge to hold the benchmark interest rate close to zero for an “extended period” and said “tight credit” is restraining consumer spending.

“I’m comfortable with rates where they are now,” Lacker, who doesn’t vote on rate decisions this year, said today at the opening of an exhibit at the Richmond Fed on the history of the central bank. “You have some surges, some slower periods. It’s just going to be a choppy recovery.”

Separately, Fed Governor Elizabeth Duke said in an interview with CNBC that the central bank is “in the right place” on its monetary policy and that she sees a “moderate recovery” taking place.

Treasuries were little changed today, with the yield on the 10-year note rising to 3.06 percent at 3:35 p.m. in New York from 3.05 percent late yesterday.

Small Business Lending

Bernanke, speaking today at a Fed-hosted conference in Washington on small-business lending where Duke also appeared, said small firms are having a tough time getting the loans they need to expand or stay afloat and keep the U.S. recovery going.

“Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges,” said Bernanke, 56. “Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers.”

Investors’ expectations for a Fed rate increase have fallen since the June meeting of policy makers. Investors are discounting about 31 basis points of tightening over the next 12 months, a decline from about 42 basis points on June 22, the first day of a two-day Fed meeting, according to data calculated by Credit Suisse using the overnight index swap curve.

Growth Outlook

Growth in the world’s largest economy will average 2.8 percent from the current quarter through the second quarter of 2011, according to the median estimate of 52 economists surveyed by Bloomberg News from July 1 to July 8, down 0.1 percentage point from last month.

“I think what’s been happening is some market participants are over reacting to a couple of reports that have been a little bit below what people expected,” Lacker said. “We had some reports better than expected a couple of months ago. I think this is going to be a recovery that’s like that over time.”

The Labor Department reported this month that private employers added 83,000 jobs in June, less than the 110,000 forecast in a Bloomberg News survey of economists. Homebuilders started building dwellings at the slowest pace of the year in May, after the expiration of a housing tax credit. Housing starts fell 10 percent in May to a 593,000 annual pace.

‘Doing Damage’

“I don’t expect a dramatic worsening” in housing, Lacker said. “Housing is such a small portion of the economy now it’s a little less capable of doing damage. I think we can withstand some shocks to housing and some fluctuations to housing.”

Lacker, 54, said he expects the rate of inflation to begin to increase toward the end of 2010.

“At the beginning of the year we were getting some low inflation numbers, but inflation expectation measures remained pretty stable,” Lacker said.

“Lately the core inflation numbers have firmed up a bit. I think what we’re most likely to see is inflation gravitating back to the 1.5 to 2 percent range,” Lacker said, adding that the risk of deflation, or a broad-based decline in prices, is low.

Lacker said he is skeptical the Fed’s Term Deposit Facility will be an effective tool for removing more than $1 trillion in excess reserves in the banking system. The Fed has held two tests of the program, which is analogous to a certificate of deposit, and will announce the results of a third test tomorrow.

“It’s not clear a term deposit facility is going to really meaningfully tighten monetary conditions,” Lacker said. “Asset sales are the proven effective way to drain reserves, to drain monetary assets.”