Richmond Fed president sees positive signals for economy

NORFOLK

With the nation's economic recovery showing signs of faltering, some have called on the Federal Reserve to take more aggressive action.

By resuming purchases of Treasury and mortgage-backed securities, the Fed could prop up demand for those securities and help swell the amount of credit available for borrowers.

But Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, urged restraint by the nation's central bank.

"Growth was a little slower than expected at the end of the second quarter," he said in an interview Wednesday. "This is going to be a choppy recovery. Growth was better than expected in the first quarter. I still think we are going to see moderate growth for the next few quarters. I don't think we're close to needing further stimulus."

Lacker became president of the Richmond Fed in 2004 after heading the bank's research department for 10 years. It is one of 12 regional banks in the Fed system. The Fed guides the nation's monetary policy, including interest rates, and supervises banks and financial institutions.

He visited Hampton Roads last week to meet with business leaders and tour major facilities in the region, including the Northrop Grumman Newport News shipyard and NASA Langley Research Center in Hampton.

The Lexington, Ky., native, who earned a doctorate in economics from the University of Wisconsin and later taught at Purdue University, offered some observations on Wednesday about the economy and the financial-overhaul legislation in Congress.

Q. Some economists have talked about the risks of deflation and a sustained decline in prices in the U.S. economy. It appears from your recent remarks that you see conditions differently.

A. I think a lot of economists do. What we see is that inflation numbers, particularly the core inflation numbers, came in on the low side early in the year, but the core numbers have picked up lately. Our measures of what people expect inflation to be have remained pretty stable. That suggests to me that inflation is going to gravitate back to 1.5 to 2 percent, so I don't see deflation as a major issue.

Q. Are there economic indicators that you watch closely? If so, what are they signa ling?

A. Business spending on equipment and software, I think, is very important right now. That's been pretty strong lately. I think it will continue to grow strongly. Firms either see a lot of opportunities to reduce costs or improve products or business processes by investing in new technology platforms or upgrading equipment.

Q. The Dodd-Frank financial-overhaul bill is about to emerge from Congress. Are there any major issues that the bill didn't address that you think have to be tackled?

A. I think the major issue is the government's relationship to policy about housing finance. Fannie Mae and Freddie Mac were big drivers of the run-up in housing and the financial crisis. They are being run by the government in conservatorship. We need to decide how to wind them down. We need to decide if we are going to create a substitute for them. I think we ought to take away from this whole thing the lesson that we probably over subsidized housing to a large extent, and that is what did us in.

Q. Are there sufficient mechanisms in the Dodd-Frank bill to address the collapse of financial institutions considered too big to fail?

A. The bill does provide the federal government with more tools to deal with a large failing institution. The intention is for them to use these tools to liquidate the company in an orderly way. One key question that remains unanswered is the bill provides the federal government with the capability to protect short-term creditors in failing institutions. If they use that, the too-big-to-fail problem could remain with us. They might not succeed at reducing financial instability.

Q. What impact will the Dodd-Frank bill have on the Federal Reserve Bank of Richmond?

A. The major impact is greater responsibility. There's the possibility some institutions in our district will be viewed as systemically important, so we have to gear up a program for monitoring and overseeing them. In the last two years we have had to step up dramatically our work with the Bank of America in Charlotte and a couple of other large institutions, particularly their non-bank activity.

The bill would also create this new bureau of consumer financial protection within the Federal Reserve System, but it will be separate from the Federal Reserve.

There's a chance that a small handful of our folks could be transferred to that new bureau. Some of our staff might become part of the bureau. They would remain in the Richmond area. Washington is where the rule-writing goes on for consumer financial protection.

What we do in the field is oversee the compliance with consumer financial protection at the institutions we have responsibility for. The Federal Reserve Board of Governors often draws on the expertise at Federal Reserve banks.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com