Richmond Fed President Jeffrey Lacker is becoming less comfortable with the Fed's language promising to keeping interest rates low for an extended period and would favor changing it shortly before the Fed raised rates.
"I said a couple months ago I was comfortable with it. I'm still comfortable with it, but my comfort is diminishing somewhat over time," he told CNBC in an exclusive interview from his office in Richmond. "And—it's somethin' that, you know, we're not gonna—I'm not be comfortable with forever."
Lacker, known as one of the hawks on the Federal Reserve's rate-setting Open Market Committee, said he expects "employment to expand this year; probably not very rapidly and probably not enough to bring the unemployment rate down by a tremendous amount."
But he added that a decline in the elevated productivity numbers would likely mean an acceleration in job growth as the year progresses. “Friday’s employment report is evidence that the labor market is bottoming out,” Lacker said. US nonfarm payrolls rose 162,000 in March, after February’s drop of 36,000. The unemployment rate held steady at 9.7 percent for the third straight month, as expected.
He judged the US recovery as "sustainable" and said the economy is unlikely to see another dip.
Lacker is likely at odds with many members of the FOMC when it comes to the exit strategies. He said that the first thing the fed should do is sell assets on its balance sheet. "For me it's the logical first place to start if you wanna drain reserves," Lacker said.
He added that he preferred asset sales to “untested” reverse repos, term deposits as methods of reducing the government’s liabilities. "We have to get to a point where we’re holding Treasuries only….reducing reserves before we raise rates makes a lot of sense.”
A copy of the massive banking reform bill proposed by Senator Chris Dodd, (D) Connecticut, lay on a table in Lacker's office, and he did not offer a kind review of its contents. "I read the Dodd Bill and the mechanism it sets up for the resolution authorities. It doesn't strike me that it's likely to help us there. And in fact, it seems to me like—a major danger is that there's gonna be more instability.
Lacker said the bill's failing is that it continues to give discretion to the government to bailout a bank. He argues that a bi greason for the financial crisis was ambiguity over what companies were included in the government's financial safety net and which were not.
"I think the market was significantly distorted by too big to fail," Lacker said.
Addressing public jitters over the Fed potentially raising the discount rate, Lacker indicated that there are huge amounts of reserves in the system, and that general sentiment is that the spread (between the discount rate and the fed funds rate) ought to remain at 50 (0.50 percentage points), rather than 100 basis points.
“We won’t know what normal spread is until reserves are back to their normal operating range ,” Lacker said.
—Reported by Steve Liesman; Written by Barbara Stcherbatcheff
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