RALEIGH, N.C. -- U.S. inflation expectations are well anchored but the Federal Reserve must not delay tightening monetary policy once the recovery begins, to ensure they stay in check, a top policy-maker said on Wednesday.
"The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation," said Richmond Federal Reserve President Jeffrey Lacker, referring to the Fed's policy-setting committee.
"Choosing the right time to withdraw that stimulus will be a challenge, and I believe it will be very important to avoid the risks of waiting too long or moving too slowly," he told the North Carolina Senate Appropriations Committee in prepared remarks.
Lacker, a voting member of the FOMC this year, said he was confident stable inflation expectations would help to keep price pressures well-anchored, provided the Fed withdraws the aggressive monetary easing that it put in place to buffer growth.
"The danger will be that we will not shrink our balance sheet enough when the recovery emerges to prevent rising inflation," he said.
The Fed has cut interest rates to almost zero and doubled the size of its balance sheet to around $2 trillion, in part by purchasing U.S. government bonds and mortgage debt, to fight the worst financial crisis since the Great Depression.
Lacker did not refer directly to this policy of so-called quantitative easing in his prepared remarks, but he did emphasize that a recovery looked on track.
He said evidence was slowly accumulating to reinforce hopes that a severe U.S. recession will end later this year, noting a pick-up in some housing indicators, a recovery in business sentiment gauged by the Richmond Fed, and a "smidgen" of proof supporting the view that inventory building could bounce back.
He said that stress tests on the country's biggest 19 banks had also helped confidence in the financial sector, and he noted that credit conditions had eased, but warned labor market conditions would continue to get worse before they got better.
"It now appears as if the pace of contraction is diminishing, and at some point later this year, activity will bottom out and begin expanding again," he said.
© 2009 Reuters. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
|
