Fed’s Lacker Sees ‘Modest’ U.S. Growth of 2% to 2.5% This Year

Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy will expand at a “modest” rate this year as it works through “persistent impediments” in housing and labor markets.

The Richmond Fed chief, a voting member of the Federal Open Market Committee in 2012, also told a group of risk managers in his hometown that the year should bring “with it more modest expectations for monetary policy.”

“My takeaway from 2011 is the lesson that the impediments to more rapid U.S. growth are likely to be deeper and more persistent than we thought a year ago,” Lacker said. “I am expecting only a modest improvement for 2012.”

Lacker forecast the economy will grow between 2 percent and 2.5 percent this year. Economists surveyed by Bloomberg News this month predict the economy will expand 2.3 percent, according to the median estimate. Fed officials estimated in November that growth of 2.4 percent to 2.7 percent is needed to absorb unused productive capacity.

He also said he sees inflation of about 2 percent. The figure could be lower if global growth slows, he said. “But I still view the risks to inflation as tilted to the upside.” The personal consumption expenditures price index excluding food and energy rose 1.7 percent for the 12 months ending November.

U.S. central bankers next meet Jan. 24-25. At that time, they will submit fresh forecasts the next three years, and for the first time make public their estimates for the benchmark lending rate.

Lacker gave only an indirect indication of his policy posture at the first meeting of the year.

‘Too Much Influence’

“Monetary policy is given credit for entirely too much influence on real economic activity,” he said. “Despite large- scale efforts to provide more monetary stimulus” in 2011, he said, “growth disappointed and inflation moved upward.”

Lacker said the U.S. housing market “appears to be in for a lengthy adjustment process” as the market deals with oversupply and tighter lending standards.

“Substantial real income gains will be required before demand catches up to the current housing stock,” he said.

Non-farm payrolls rose by 200,000 in December, above the median estimate of 155,000. The jobless rate fell to 8.5 percent while hours worked and earnings climbed. Sustained hiring is needed to support household spending which accounts for about 70 percent of the U.S. economy.

Lacker called the jobs report “a heartening sign of a potential firming trend.” Still, the labor markets are struggling with skill mismatches that arise as workers from slow-growing industries such as construction seek to find jobs in faster-growing ones.

“Labor-market mismatch might account for between 0.8 and 1.4 percentage points of the increase in unemployment in this recession” according to one study, the Richmond Fed president said.