Financial Watch

Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy will probably expand at a moderate pace for the rest of this year as spending by consumers and businesses picks up.

The Labor Department’s report of 162,000 jobs added to payrolls in March was the “most encouraging sign” yet of a recovery, and the “risk of a pronounced decline in inflation has diminished substantially,” Lacker said yesterday in a speech in Morgantown, West Virginia.

Lacker stopped short of endorsing any change to Fed monetary policy. Last month, Fed officials reiterated a pledge to keep rates very low for an “extended period,” citing employers’ reluctance to add jobs and depressed home building.

“I think the recent data has made me think that it might be sooner rather than later that we remove that language” on the duration of low rates, Lacker said to reporters after the speech, without specifying the data. “I’m not there yet.”

Lacker in his speech said the labor market appears “to be lifting itself off the floor.” Fed Chairman Ben S. Bernanke is scheduled today to testify before Congress’s Joint Economic Committee.

“I suspect that most of you have heard that the recession is over, and I also suspect that few of you feel like the recession is over,” Lacker told business leaders in the city, home to West Virginia University and part of the Richmond Fed’s region, which encompasses five states and the District of Columbia.

Home Loans

Last month, U.S. central bankers wrapped up $1.25 trillion in purchases of mortgage-backed securities aimed at keeping costs on home loans low. The purchases have increased the central bank’s balance sheet to $2.31 trillion in total assets from $926 billion at the start of 2008.

The U.S. doesn’t “need the stimulus that would be provided by further mortgage-backed securities” purchases, Lacker said in response to an audience question.

Lacker reiterated his view that he would prefer to drain cash reserves from the banking system mainly by selling the mortgage debt at a “steady, moderate, pre-announced pace.” “In fact, by adding to the floating private sector supply, it should improve market liquidity, which reportedly has been hampered by our large-scale purchases,” he said.

Economy Expanded

The jobs added by U.S. employers in March were the most in three years. The unemployment rate held at 9.7 percent, close to a 26-year high.

“While even the more optimistic forecasters do not expect rapid growth in employment this year, the labor market does seem to be lifting itself off the floor now,” Lacker said.

At the same time, “the unemployment rate is still high nationally,” Lacker said. “We are a long way from a full recovery.”

A price gauge favored by the Fed, the personal consumption expenditures price index, minus food and energy, rose 1.3 percent for the year ended in February, slowing from a 1.5 percent rate in January. Fed officials have a longer-run goal of 1.7 percent to 2 percent for the full PCE price index. “Inflation remains benign,” Lacker said.

Inject Money

Lacker, 54, doesn’t vote on FOMC interest-rate decisions this year. He dissented from an FOMC decision in January 2009, indicating a preference to inject money into the banking system through purchases of U.S. Treasury securities instead of more narrowly through housing debt. In 2006, Lacker dissented four times in favor of higher rates.

Regional Fed presidents have been trying to defend the central bank against proposed Senate legislation that would strip it of supervision of about 5,000 banks with less than $50 billion in assets.

He said the financial-overhaul proposals in the House and Senate, which aim to give the government a way to wind down failing financial firms and avoid bailouts, may instead give regulators too much discretion to rescue companies with taxpayer money. The legislation may feed a cycle of new financial products, another crisis, rescue and additional regulation, he said.

“Striking and preserving the right balance between the safety net, regulation, and market discipline is vital to ensuring that financial markets make positive contributions to the resiliency and growth of our economy over the long run,” Lacker said.