UPDATE 1-Markets overreacting to soft data-Fed’s Lacker

(Adds comments, background, details)

By Pedro Nicolaci da Costa

RICHMOND, Va., July 12 (BestGrowthStock) – The U.S. economy remains
on track for firm growth and investors should not worry too
much just because a few reports have been weaker than forecast,
Richmond Federal Reserve Bank President Jeffrey Lacker said on
Monday.

A soft batch of economic data, including anemic hiring and
battered consumer confidence, have raised concerns the recovery
might be cut short.

But Lacker, a known inflation hawk, said he was not greatly
concerned, adding that Europe’s debt troubles would not have a
great impact on the U.S. outlook.

“Market participants seem to be overreacting to a couple
of reports that have been a little bit below what people
expected,” he told reporters after the launch of the “Fed
Experience” exhibit at the Richmond Fed.

“What I’ve seen in the data reports isn’t inconsistent with
a moderately paced recovery,” said Lacker, who is not a voter
this year on the Fed’s policy-setting Federal Open Market
Committee.

In that context, Lacker suggested that market speculation
that the central bank might need to take further steps to ease
borrowing costs even further — even though interest rates are
already effectively zero — is quite premature.

“For me, consideration of further easing steps now is very
far away,” he said. “It would take a very substantial,
unanticipated adverse shock.”

Asked if he was concerned about a double-dip in housing,
which was at the epicenter of the biggest financial crisis in
modern U.S. history, Lacker said the sector’s shrinkage means
it now plays less of a role in overall activity.

He noted a downturn in sales and construction following the
expiration of a home-buying tax credit, but added he does not
see a dramatic worsening from current levels.

In response to the financial turmoil that began in the
summer of 2007, the Fed cut interest rates sharply to their
current zero to 0.25 percent range. It also undertook an array
of emergency steps aimed at soothing ailing credit markets,
including massive purchases of mortgage and Treasury bonds.

Lacker argued that the extent of such actions was such that
small reserve draining operations, such as the “term deposits”
the Fed has been testing recently, would not do the trick when
the central bank decides to pull back.

Instead, he favors outright sales of assets, a view that
puts him at odds with some of his colleagues on the Fed’s
Washington-based board.

“It’s not clear the term deposit is going to meaningfully
tighten monetary conditions,” he said. “Asset sales are the
proven, effective way, to drain reserves.”

On the fiscal side, Lacker said a credible plan for
reducing the budget deficit would aid rather than hinder the
economy’s rebound.

UPDATE 1-Markets overreacting to soft data-Fed’s Lacker