Lacker says Fed should get out of mortgage market

By Pedro Nicolaci da Costa

BALTIMORE (Reuters) - An improving U.S. housing market suggests it is time for the Federal Reserve to stop aiming its stimulus at the real estate sector, Richmond Fed President Jeffrey Lacker said on Wednesday.

"When you look at housing market conditions, I think you could make the case that we should be getting out of mortgage-backed securities," Lacker told reporters after a speech.

Lacker, an inflation hawk who has consistently opposed mortgage-backed securities purchases by the central bank, said the process of getting out of the market could be initiated by reinvesting the principal from maturing mortgage bonds into the Treasury market.

After slashing official interest rates to effectively zero in late 2008, at the height of a global financial crisis, the Fed is on track to buy over $3 trillion in securities in an effort to bolster an anemic recovery.

While he admitted that the recent growth record had been disappointing, Lacker said a 2 percent growth rate was pretty good considering all the challenges facing the economy.

Asked about a recent decline in inflation to around half the Fed's 2 percent target, Lacker said the dip was likely transitory. He said he was not worried about adverse reaction on Wall Street from an eventual curtailing of the Fed's asset purchases.

The Fed said earlier this month it could either boost or reduce its current monthly pace of $85 billion in asset buys.

"I don't see any effective constraints on our ability to reduce the pace of asset purchases without undue market reaction," Lacker said following an economic outlook speech that largely echoed remarks made on May 3.

U.S. economic growth continues to sputter along in fits and starts, rebounding to a 2.5 percent annual clip in the first quarter following a very weak end to 2012. The jobless rate has come down from a crisis peak of 10 percent in late 2010 to its current 7.5 percent. The Fed pledged in December to keep buying bonds until it saw substantial improvement in the outlook for U.S. employment.

Lacker said he was not worried about the threat of higher inflation for now, but believes the Fed's unconventional policy measures raise the risk of quicker price growth down the line.

"Inflation doesn't take care of itself - it requires some attention from a central bank," he said. "The inflation outlook looks good now, but I think there are risks to the inflation outlook a couple of years ahead of us."

(Editing by Leslie Adler and Peter Cooney)

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