Jeffrey Lacker’s comments on growth, monetary policy, and Ukraine

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Jeffrey Lacker's comments on growth, monetary policy, and Ukraine (Part 1 of 5)

Jeffrey Lacker’s speech

Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, shared his opinion on the outlook for the U.S. economy, the Fed’s policy, and possible impacts of the turmoil in Ukraine on economic growth at an event organized by the Council of Economic Education in New York on March 4, 2014. The series analyzes that speech.

The U.S. equity market (SPY) has gained on the improved outlook for the labor market. However, Lacker added that equity markets might be coming in line with his view that economic growth will slow this year to “a little above” 2%, due to muted consumer and business spending and modest growth in the labor market.

An increase or decrease in the labor force implies that the economy is expanding or contacting. Increases in the labor force simply mean more people are playing a productive role in economic development. As employment increases, so do disposable income levels. So an increase in the labor force leads to a rise in demand for goods and services, lifting corporate profitability. The increased revenues and profitability in turn drive stock prices upward.

However, when the economy improves, it allows the Fed to increase interest rates, leading to falls in bond prices (BND). An improving economy builds investors’ appetite for riskier bonds as default rates decline, leading to contraction in the credit spread on riskier assets, including high yields bonds (HYG) and emerging market securities (EEM). Credit spread is the risk premium an investor demands for holding risky assets over U.S Treasuries.

Some major ETFs covering U.S. Treasuries include the iShares Barclays 20+ Year Treasury Bond (TLT) and the iShares Barclays 10-20 Yr Treasury Bond (TLH).

To see how economic growth could impact U.S. equity and fixed income markets, read on to the next part of this series.

Continue to Part 2

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