In remarks at an economic conference in West Virginia, Richmond Fed President Jeffrey Lacker reviewed the role of monetary policy as he sees it and the role the Fed plays in implementing that policy. In Lacker's view, though, the Fed is limited in what it can do to offset the "various frictions" that companies face in determining the right prices for their products, in the ways companies invest, and in the ways companies and people create and fill jobs.
Monetary policy is simply unable to offset all of the ways in which various frictions impede the economy's adjustment to various shocks. It's unfortunate, but the effects of monetary stimulus on real output and employment are less than is widely thought; they consist largely of the transitory byproducts of frictions that delay the timely adjustment of prices to changes in monetary conditions.
And while Lacker bemoans the slow economic recovery in the United States, he blames the lack of investment in housing, the job shift away from construction, cautious consumers and uncertainty among businesses about whether to expand.
He believes that U.S. GDP growth will remain around 2% next year and that it will improve by the end of the year. Lacker predicates his outlook on a resolution to the fiscal cliff, less uncertainty about what will happen in Europe, an improvement in home construction and no surprises.
But he goes on:
Beyond hitting our inflation target, though, it's not clear whether monetary policy, by itself, can bring about any material improvement in economic growth right now.
He defends his votes against the Fed's easing policies, saying that "at some point" growth will return and then the Fed will need to raise interest rates to fight inflation. He then says:
I do believe that we have the tools we need to withdraw accommodation soon enough and rapidly enough to keep inflation on target. But as a practical matter, we are in uncharted territory, and that will make it difficult to get the timing just right. In the Fed's 99-year history, we have never eased monetary policy as aggressively as we have over the last few years. The larger our balance sheet when the time comes to withdraw monetary stimulus, the more difficult and risky that process will be. In my view, the balance of considerations suggests that we should be standing pat now rather than easing policy further.
He concludes by pointing out that the Fed decision to buy mortgage-backed securities distorts lending by favoring one kind of investment over another. Lacker believes that the Congress and the president should be making those calls, not the Fed.
The full text of Lacker's speech is available here.
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