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Fed's Lacker: Market Volatility Should Not Sap US Growth

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.
Joshua Roberts | Getty Images
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.

Financial markets should brace for more volatility as they digest news the Federal Reserve will scale back bond buying later this year, a senior central banker said on Friday, but this is an understandable adjustment and will not derail growth.

"This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented," said Richmond Fed President Jeffrey Lacker.

He told a judicial conference to expect U.S. growth to fluctuate around 2 percent for the "foreseeable future," blaming structural impediments to a faster pace of economic activity.

Lacker, one of the central bank's most hawkish officials who is not a voter this year, also said it had been "wise" for Fed Chairman Ben Bernanke to clarify the Fed's views on future bond buying last week, but stressed policy would still be loose.

(Read More: Fed Speakers Out in Force as Markets Stabilize)

"Over the course of the next 12 months, the committee will be reducing only the pace at which it is adding accommodation," he said, referring to the Fed's policy-setting committee. "In other words, the Federal Reserve is not only leaving the punch bowl in place, we're continuing to spike the punch, though at a decreasing rate over the next year," he said.

It is a longstanding joke among central bankers to warn their job is that of official party-pooper, who must take away the punch bowl—a fruity drink reinforced with hard liquor—just as the party is getting started.

Bernanke shocked world markets last week by announcing the Fed would begin reducing the $85 billion monthly pace of bond purchases later this year and would end the program by mid-2014, provided the economy grows as the central bank expects.

(Read More: Obama Has Short List of Bernanke Succesors)

The Fed has held interest rates near zero since late 2008 and more than tripled the size of its balance sheet to over $3.3 trillion through an aggressive campaign of asset buying aimed at holding down longer-term borrowing costs.

Lacker opposed the third round of this so-called quantitative easing, or QE3, and repeated his concern it was not aiding the economy, but could make it harder down the road for the central bank to exit from its unprecedented actions.

Speaking at an annual conference for the U.S. Court of Appeals for the Fourth Circuit, hosted in the heart of the mountains of West Virginia, Lacker said investors were also now reconsidering when the Fed will start raising interest rates.

"These reassessments appear to have warranted price changes across an array of financial assets. As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely," he cautioned.

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