It is reasonable to assume that the U.S. economy will improve in 2009, but the financial safety net needs to be rolled back, according to Richmond Fed President Jeffrey Lacker speaking at the Maryland Bankers Association's annual economic forum.
"The critical policy question of our time is where to establish the boundaries around the public-sector safety net provided to financial market participants, now that the old boundaries are gone," Lacker said. "In doing so, the prime directive should be that the extent of regulatory and supervisory oversight should match the extent of access to central bank credit in order to contain moral hazard effectively."
The comments come just as the U.S. government is gearing up for another bout of relief to the financial system, including the release of the second half of the Treasury's $700 billion TARP, and U.S. President-elect Barack Obama looking for a $775 billion stimulus package, which includes infrastructure spending and tax breaks.
"Mixing monetary and fiscal policy is fraught with risks," Lacker said. "Many historical instances of monetary instability have been the result of central banks being prevailed upon to use their balance sheets for fiscal ends in ways that impeded their ability to keep inflation under control."
The central banker went on to argue that the threat of deflation is no longer a risk to the U.S. economy and that it is critical for policy-makers to keep in mind future price developments in writing today's policy.
In November, U.S. consumer prices pointed to an annual inflation rate of 2.0%, down from the previous month's 2.2% level.
Today's appearance was Lacker's first this year as an FOMC voting member. The Fed will next meet on Jan. 28 and although rates are already at zero, the OIS market has priced in a 22% chance of a 25 bps cut.
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2009