Drags On Economy 'More Serious' Than Thought: Lacker

The US economy is expected to grow modestly this year however it will face difficulties such as unemployment, housing and Europe's debt crisis that are going to be more serious than what was expected.

Published: Wednesday, 11 Jan 2012 | 12:28 PM ET
By: Jennifer Leigh Parker

The US economy will grow modestly this year, but the difficulties posed by unemployment, housing and Europe's debt crisis are "more serious than we thought," Richmond Fed President Jeffrey Lacker told CNBC Wednesday.

Lacker, who becomes a voting member of the Fed's policy committee this year and is known as an inflation hawk, said GDP growth was in the 1-1.75 percent range last year and will increase to 2-2.5 percent this year.

"I think we'll make more progress on unemployment, but it's likely to be slow," he said in a live interview. "We're seeing a decline in participation" as frustrated job seekers drop out of the labor force.

Another problem is that there is a "labor market mismatch" in which companies have a hard time finding skilled workers, Lacker said.

Real estate also remains a drag on growth with "the housing market being flat on its back," Lacker said.

Europe's financial crisis still threatens US banks, he said, not because of exposure to European debt but because money market mutual funds have invested in Europe's short-term debt securities.

"The major vulnerability of our financial system has to do with involvement of money market funds. Until we fix the structure there, we're vulnerable to flights."

Lacker also said any additional Fed moves such as quantiative easing won't have much impact on the economy because the "Fed does not control growth."

"Our job is to keep inflation low and stable," he said. "In general, the growth rate the economy can crank out is determined by technology, people's preferences, resource endowments, and other policies."

Lacker expects inflation to remain under control in the coming year.

"We're headed toward inflation of about 2 percent in the coming year," he said, pointing to a fall in energy prices in 2011 as a factor in the number low.

"I think we're in good shape. Expectations seem to be well anchored," he said.

"There's some risks to that outlook, naturally. I think a sizeable commodity price shock that looks to be persistent could throw that off. It could pass through to core if we don't respond appropriately."

The Fed announced in its last meeting that it's going to be publishing the future interest rate paths publicly four times a year.

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