Richmond Fed's Lacker sees signs of economic bottom

RALEIGH, N.C. -- The head of the Federal Reserve Bank branch in Richmond, Va., says signs point to the economy hitting bottom later this year and then expanding.

Richmond Fed President Jeffrey Lacker told North Carolina state senators Wednesday in Raleigh that consumers are starting to spend a bit more. Lacker also said the worst of the declines in manufacturing may have passed.

He said housing construction has risen slightly and existing home sales should hit bottom later this year.

Lacker said he thinks federal stimulus spending will have only a marginal effect on broader economic recovery. He added that the Federal Reserve's challenge will be picking the right time in a budding economic recovery to tighten credit again and prevent rising inflation.

"Choosing the right time to withdraw that stimulus will be a challenge, and I believe it will be very important to avoid the risks of waiting too long or moving too slowly," he said in prepared remarks.

Lacker, a voting member of the FOMC this year, said he was confident stable inflation expectations would help to keep price pressures well-anchored, provided the Fed withdraws the aggressive monetary easing that it put in place to buffer growth.

"The danger will be that we will not shrink our balance sheet enough when the recovery emerges to prevent rising inflation," he said.

The Fed has cut interest rates to almost zero and doubled the size of its balance sheet to around $2 trillion, in part by purchasing U.S. government bonds and mortgage debt, to fight the worst financial crisis since the Great Depression.