U.S. Markets open in 6 hrs 57 mins

Fed's Lacker: Risks of further bond-buying outweigh benefits

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during the Charlotte Chamber's Economic Outlook Conference in Charlotte, North Carolina December 17, 2012. REUTERS/Chris Keane

By Steven C. Johnson

CHARLOTTE, North Carolina (Reuters) - Further monetary stimulus is unlikely to do much to help the U.S. economy and the risks of pressing ahead with the policy outweigh the benefits, a top Federal Reserve official said on Monday.

Speaking ahead of the central bank's December 17-18 policy meeting, Richmond Fed President Jeffrey Lacker said pressing on with the Fed's $85-billion-a-month bond buying program will do little to help an economy being held back by slow growth in population and productivity.

But continuing the purchases "does increase the size of our balance sheet and correspondingly increases the risks associated with the exit process when it becomes time to withdraw the stimulus," Lacker said at a Charlotte Chamber of Commerce event.

The Fed, frustrated with the slow pace of recovery from the 2007-2009 recession, has kept interest rates near zero for five years and has swelled its balance sheet to nearly $4 trillion to spur investment, hiring, and growth.

"The key issue, in my view, is the extent to which the benefits of further monetary stimulus are likely to outweigh the costs."

Lacker has said in the past that it would be appropriate for the U.S. central bank to start winding down its 15-month-old bond buying program sometime between December and March.

With unemployment now having declined to 7 percent from a post-recession high of 10 percent in 2009, financial markets are on edge about when the Fed will make its first move.

A recent Reuters poll showed a majority of Wall Street firms expect the Fed to start slowing bond purchases by March, with a handful bracing for the pullback to begin this month. The poll was conducted after data showed U.S. employers added 203,000 jobs last month, more than economists had expected.

The notion that the Fed should telegraph the end of its current round of massive bond purchases by committing to a set schedule for the wind-down appears to be gaining traction ahead of next week's policy meeting.

Gross domestic product grew at a 3.6 percent rate in the third quarter, the biggest gain since the first three months of 2012. But inventories accounted for almost half of the increase in growth and domestic demand rose more slowly. That could keep the Fed cautious about unwinding stimulus too soon.

Some measures of inflation have trended well below the Fed's 2 percent target in recent months, a sign that demand in the economy is still dangerously low.

Lacker said he expected the economy to grow by "just a little bit above 2 percent" next year and predicted employment and productivity growth would remain sluggish, partly due to mismatches between skills and job openings.

"By the same token, it's hard to believe productivity has hit some sort of plateau," he said, adding that innovation will help it increase, if at slower rates than in the past.

Lacker said he expected inflation to drift back toward the Fed's 2 percent target, noting that it has averaged 1.9 percent over the last 20 years, though he acknowledged it merited close monitoring.

(Reporting by Steven C. Johnson; Editing by Chizu Nomiyama)