Richmond Federal Reserve Bank President Jeffrey Lacker said a dramatic increase in Fed lending could destabilize the U.S. financial system.

Delivering remarks to a panel discussion on the economic outlook, Lacker said central bank lending can distort expectations and create moral hazard.

"Such expectations can themselves be very costly, because they can distort the incentives faced by, and as a result, the choices made by private-sector participants."

Lacker said it is essential that the Fed not let inflation drift from view. He also commented that it is reasonable to expect growth to return sometime in 2009.

The Richmond Fed President said he expects that a recovery will be helped by the Fed's stimulative monetary policy and lower oil prices. He also predicted that the drag in housing will lessen in 2009, while construction is expected to find a bottom.

Lacker commented that bank lending is restrained by a lack of credit and credit worthy borrowers rather than bank capital. He also predicted that the strong U.S. dollar, along with weak global economic growth, will curb exports.

By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2008