Fed must not overreact to developments in China: Lacker

BALTIMORE: The Federal Reserve must be careful about reacting to China’s financial turmoil without seeing clear signs of danger for the US economic outlook, a Fed policymaker said on Friday. Richmond Fed President Jeffrey Lacker said the Asian financial crisis of the late 1990s, which helped prompt interest rate cuts by the US central bank, was a “great analogy” for viewing the current situation.

“People overestimated the implication of the Asian market volatility for US growth and we overreacted,” Lacker told reporters after a speech in Baltimore.

“And I think we have to be careful not to overreact without evidence of significant effects on US fundamentals.” The Fed raised its target interest rate last month by a quarter of a percentage point, ending seven years of near-zero rates.

Lacker, who does not have a vote on the Fed’s rate-setting committee this year but will participate in its discussions, had pressed for rate increases earlier in 2015, but his colleagues balked after worries over slower economic growth in China triggered a global equities selloff.

Speaking after the US Labor Department reported a robust increase in nonfarm payrolls for December, Lacker said the data showed job growth was “very solid” and that wages were on a clear upward trend that suggested inflation could move higher this year.

He said he favors the Fed committing to a steady winding down of the massive trove of securities it acquired as part of its efforts to stimulate the economy in response to the 2007-2009 financial crisis.

The Fed’s balance sheet should be wound down as quickly as it was built up, he said, adding that the central bank doesn’t need to hold any more than $100 billion in excess reserves.

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