Fed's Lacker wants earnest rethinking of bond buys

The U.S. economic recovery is picking up steam and the Federal Reserve should continuously reevaluate its policy of buying government bonds to support growth, Richmond Fed President Jeffrey Lacker said on Friday.

Lacker, a known inflation hawk who has been skeptical of the Fed's latest effort to purchase $600 billion in Treasury securities to keep long-term rates low, said the policy carries risks at a time when the expansion is gaining momentum.

The provision of further monetary stimulus at this point in the business cycle is not without risks, Lacker told a luncheon sponsored by the Risk Management Association's Richmond Chapter.

While the outlook may not have improved enough just yet to warrant adjusting our purchase plan in the near-term, I anticipate earnest reevaluation as economic developments unfold in coming months, he said.

Lacker offered a rather positive outlook for the U.S. economy despite ongoing troubles in housing and a labor market that remains too anemic to generate jobs for the millions of Americans who lost them during a deep recession in 2008-2009.

He said he expects gross domestic product to expand between 3.5 percent and 4 percent this year, a more optimistic forecast than that offered by Fed Chairman Ben Bernanke in remarks on Thursday. He sees growth between 3 percent and 4 percent.

The U.S. economy has begun a phase of the recovery in which growth can be sustained at an above-trend rate, Lacker said.

Acknowledging continuing problems in real estate markets, which saw foreclosures top 1 million for the first time ever during 2010, Lacker said he thought the worst had already passed for the beleaguered sector.

Lacker said labor markets were firming gradually, and consumer spending should remain robust enough to make further inroads in bringing down the nation's elevated 9.4 percent unemployment rate.

Despite some pockets of strength, the latest jobs numbers have been disappointing at best, with weekly jobless claims jumping last week and job creation for December coming in well below analyst estimates.

U.S. GDP grew 2.6 percent in the third quarter, not enough to put a dent on the unemployment problem. However, a recent pick-up in business activity and consumer spending has prompted upward revisions to 2011 forecasts from private sector economists.

(Editing by Andrea Ricci)