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Lacker: Fed Continues to Spike the Punch Bowl

“Financial markets should brace for more volatility as they digest news the Federal Reserve will scale back bond buying later this year, a senior central banker said on Friday, but this is an understandable adjustment and will not derail growth.

“This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented,” said Richmond Fed President Jeffrey Lacker.

He told a judicial conference to expect U.S. growth to fluctuate around 2 percent for the “foreseeable future,” blaming structural impediments to a faster pace of economic activity.

Lacker, one of the central bank’s most hawkish officials who is not a voter this year, also said it had been “wise” for Fed Chairman Ben Bernanke to clarify the Fed’s views on future bond buying last week, but stressed policy would still be loose.

“Over the course of the next 12 months, the committee will be reducing only the pace at which it is adding accommodation,” he said, referring to the Fed’s policysetting committee.

“In other words, the Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year,” he said.

It is a longstanding joke among central bankers to warn their job is that of official party-pooper, who must take away the punch bowl — a fruity drink reinforced with hard liqueur — just as the party is getting started….”

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