Richmond Fed's Lacker Joins Philadelphia's Plossner In Fed "Excess Liquidity" Dissent Panel

Tyler Durden's picture

Yesterday it was Philly Fed's Plossner, today it is Richmond Fed's Jeff Lacker who joins the chorus demanding an end to Bernanke's insane monetary policy of drowning the market with unprecedented liquidity which is not getting to consumers but merely propping Amazon stock at a bubblelicious 100x P/E. In a speech before the Charlotte Chamber of Commerce, Lacker stated: "The perception of inflation
risk could be particularly pertinent to the current recovery, given the
massive and unprecedented expansion in bank reserves that has occurred,
and the widespread market commentary expressing uncertainty over
whether the Federal Reserve is willing and able to promptly reverse
that expansion...
If we hope to keep inflation in check, we cannot be
paralyzed by patches of lingering weakness, which could persist well
into the recovery. In assessing when we will need to begin taking
monetary stimulus out, I will be looking for the time at which economic
growth is strong enough and well-enough established, even if it is not
yet especially vigorous. Although it is hard to predict when that will
occur, I can confidently predict that monetary policy will remain
particularly challenging for some time to come." Then again, the stock market does not seem to share Mr. Lacker's concerns.

In the meantime the bubble grows and Bernanke will not see any signs of the bubble of his own creation (yes, Ben, this time you won't be able to blame it all on Greenspan, and neither will Obama be able to put the blame on Bush) until it blows up in his face and takes the last vestige of capital markets down with him. Because with such friends as Mishkin who thinks that gold, whose price is nothing but a slap in Bernanke's face of failed policies, is merely a "sideshow", and Goldman, which believes in the multiple worlds quantum theory hypothesis where GDP can be 2.1% and 4.4% at the same time, who needs enemies.

Full Lacker speech:


The Economic Outlook, December 2009

Remarks by Jeffrey Lacker,
President, Federal Reserve Bank of Richmond

Charlotte Chamber of Commerce
Charlotte, N.C.

Thank you for inviting me to join you
again this year to discuss the economic outlook. You have heard the
news, no doubt, that most economists have declared that the recession
is over. What they mean, however, is merely that the contraction has
come to an end, not that all of our economic challenges are behind us.
Having said that, I do agree that the national economy has hit bottom
and that a recovery is solidly underway, and my remarks today will be
focused on the outlook for that recovery. Before I begin, however, I
should note that these are my own views and should not be attributed to
any other person in the Federal Reserve System.

The
backdrop to our current situation is that we have experienced one of
the steepest economic contractions on record, driven by the plunge in
housing market activity that followed the ten-year housing boom that
ended in 2005. During the boom home prices almost tripled, but by the
middle of this decade evidence began to signal that the boom had gone
too far. Vacancy rates began to hit record highs, and measures of home
construction and sales activity began to fall precipitously. Home
prices also began to decline, reducing equity values and household
wealth, and leading to rising defaults and foreclosures. After
residential investment began to decline, the rest of the economy slowed
and the expansion officially ended in December 2007. The recession that
followed was longer and deeper than any we have experienced since the
1930s. I could cite a boatload of dismal statistics, but I'll confine
myself to one in particular – the number of people employed has fallen
by 7.3 million since it peaked at the end of 2007.

That's the
backdrop. The last few months' data indicate that economic activity has
begun to improve. Starting with housing, several indicators of sales
and construction activity hit low points early this year and have risen
modestly since then. For instance, single-family housing starts have
increased by 33 percent and new home sales have increased by 31
percent. And there are also signs that home prices have bottomed out as
well. One widely followed index of existing home prices nationwide rose
a seasonally adjusted 3.7 percent from May to September. Even with
these welcome gains, however, housing activity remains well below the
pace required to accommodate population and income growth on a
sustained basis. That's to be expected as we work off the overhang of
unsold homes in many parts of the country. But at least housing is no
longer a major drag on GDP growth, and in fact it should make positive
contributions, in welcome contrast to the last three years. [Oh Jeff, wait until your own Fed is no longer buying up MBS by the trillions]

Consumer
purchases of cars and trucks also began to tail off in 2007 and then
fell very sharply in 2008. Sales hit a low point this past February and
then increased very gradually before the "Cash for Clunkers" program
boosted sales in July and August. Clearly that program pulled forward
many sales that would have occurred anyway later this year, and so it
was not surprising that sales fell back in September to about where
they were in the spring. What caught many analysts by surprise, though,
was the rebound in the sales rate in October. Granted, sales are still
well below the long-run trend that would be needed to keep the stock of
vehicles growing in line with population. But, just as with housing,
autos are no longer a drag on GDP growth and should make positive
contributions going forward, again in welcome contrast to the last two
years. [Yes, and credit-card delinquencies are back to record levels: maybe consumers should acually pay for those car purchases at some point instead of merely accumulating worthless frequent flier miles.]

Aside from autos, real consumer spending fell slightly
during the recession. But in the third quarter, consumer spending –
apart from cars and trucks – reversed course and increased at a 1.7
percent annual rate. This suggests that many U.S. households have
recovered at least a modicum of confidence about their future income
prospects.

Business spending on new equipment and software fell a
sharp 21 percent during the recession. It also has reversed course and
has registered a positive gain in the third quarter.

In addition
to these favorable domestic developments, there has been a worldwide
rebound in economic activity, which is boosting demand in our export
industries. As recently as the first quarter, real exports were falling
at nearly a 30 percent annual rate; in the third quarter, they were
increasing at close to a 17 percent annual rate.

Toting up all
these favorable demand side developments, the most recent estimate is
that real GDP grew 2.8 percent in the third quarter, its most rapid
growth since mid-2007. As a result, prominent academic and industry
economists have proclaimed the end of the recession and are looking
forward to a lengthy period of sustained growth in overall economic
activity. Those forecasts look quite reasonable to me. In the near
term, production will receive a boost as a result of the shift underway
from inventory liquidation to inventory accumulation. That boost to
production will necessitate the hiring of new workers, which will add
to households' incomes. Consumers, having deferred many purchases
during the recession, will respond to growing incomes with higher
spending. This is typical of the period immediately following a
recession, and this time should be no different.

Indeed, we are
seeing the first signs of improvement on the supply side. Industrial
production has increased for four straight months. While a significant
part of the increase was due to a resumption of auto production by GM
and Chrysler, even without autos, industrial production has increased
by a solid 1.9 percent over those four months. Moreover, a survey-based
index published by the Institute for Supply Management has risen
substantially this year, and indicates that the growth in manufacturing
activity is spread broadly across different industries. The new orders
component of their index has registered even more impressive growth
over that period. These particular indexes have a 60-year track record
of giving highly reliable signals on recession and recovery, and we
have no reason to suspect a break from past form.

One key element
supporting the recovery is the significant improvement in financial
conditions that has occurred this year. Corporate borrowing costs have
declined considerably, as interest rates on commercial paper and
corporate bonds are now much lower than they were last year. Many major
banks have sold stock successfully and now have the capital to support
new lending, even if conditions turn out worse than expected. Although
many borrowers naturally face tougher credit terms in a soft economy,
the banking system as a whole appears capable of supporting business
investment and expansion.

While the outlook has brightened in
recent months, we still face major economic challenges. In commercial
real estate, construction is falling, vacancy rates are rising, and
falling property prices are eroding owners' equity positions. Holders
of commercial-mortgage-backed securities have already taken sizeable
losses, with more on the horizon as numerous projects are scheduled for
refinancing. And some community banks have lent heavily to commercial
real estate developers and are now facing rising delinquencies and
losses. No one expects a quick reversal of these negative trends, and
as a result, business investment in nonresidential structures is likely
to be a substantial drag on U.S. growth in the near term.

More
worrisome is the extremely weak labor market. The number of people
employed has fallen for 22 straight months. The unemployment rate has
more than doubled, to a 10.2 percent rate. Wages are under pressure; so
far this year average hourly earnings have only risen at a 2.1 percent
annual rate, about half its rate in mid-2007. Going forward, as overall
economic activity continues to improve, employment will bottom out and
then begin to return to an upward trajectory. Even the more optimistic
forecasters, though, do not expect a rapid improvement in national
labor market conditions, and we will need to carefully monitor
employment and earnings for an extended period.

Putting the whole
picture together, I think the most likely outcome is that the economy
will grow at a reasonable pace next year – housing should continue to
recover from a very depressed state, consumers should gradually expand
spending, business investment should make something of a comeback, and
these components of demand should overcome a continuing drag from
commercial construction.

I'll turn now to the outlook for
inflation and monetary policy. Inflation has been running about 1.5
percent recently, and from my point of view, that's ideal. Earlier this
year some economists were highlighting the risk that the low level of
economic activity could push the rate of inflation down, perhaps even
below zero. I think the risk of a substantial further reduction in
inflation has diminished substantially since then. In fact, we have
seen that even in the early stage of a recovery, inflation and
inflation expectations can drift higher.
The perception of inflation
risk could be particularly pertinent to the current recovery, given the
massive and unprecedented expansion in bank reserves that has occurred,
and the widespread market commentary expressing uncertainty over
whether the Federal Reserve is willing and able to promptly reverse
that expansion.

As a technical matter, I do not see any problem –
we do have the tools to remove as much monetary stimulus as necessary
to keep inflation low and stable. The harder problem is the same one
that we face after every recession, which is choosing when and how
rapidly to remove monetary stimulus.
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. In assessing when we will need to begin taking
monetary stimulus out, I will be looking for the time at which economic
growth is strong enough and well-enough established, even if it is not
yet especially vigorous. Although it is hard to predict when that will
occur, I can confidently predict that monetary policy will remain
particularly challenging for some time to come.