“It would be quite hard to justify additional monetary stimulus, absent a dramatic deterioration in economic conditions, which I do not view as likely,” Lacker said Wednesday in a speech to the Economics Club of Hampton Roads, Virginia. “Additional easing is unlikely to have much positive effect on growth prospects, but could well generate a sustained surge in inflation that would be costly to reverse.”

Lacker has dissented at all three meetings this year of the policy-setting Federal Open Market Committee. On April 25 the FOMC said the economic outlook will probably warrant “exceptionally low levels for the federal funds rate at least through late 2014.” Lacker disagrees, saying in an April 27 statement that “an increase in interest rates is likely to be necessary by mid-2013” to hold down inflation.

More financial instability in Europe could damp the U.S. expansion, Lacker said in his speech. The place to look for “fallout in the U.S. financial system” from Europe’s credit crisis is short-term money markets, he said in response to an audience question.

“U.S. money market mutual funds have substantial exposure to European banks,” Lacker said.

‘Most Likely Avenue’

As the European crisis deepened last year, many money market mutual funds “dramatically” reduced their holdings of bank debt from vulnerable countries, he said. “If there’s got to be a spillover,” the most likely avenue for it would be in money markets, he said.

The Richmond Fed president said the moderate pace of economic expansion “has meant significant economic hardship” for many Americans seeking employment. Still, impediments to growth probably can’t be overcome by more accommodation by the Fed, he said.

Housing markets are going through a “lengthy adjustment process,” he said. Lacker said a mismatch between the skills employers need and what job seekers have to offer may be slowing hiring. Uncertainties about tax, budget and regulatory policies may also be discouraging both investment and hiring, he said.

‘Quite Real’

“The impediments to growth that I have discussed today are all quite real,” Lacker said. “They are factors for which monetary policy is not the remedy. Monetary policy will not occupy vacant homes or give unemployed workers the skills to fill vacant jobs or reduce regulatory and fiscal uncertainty. Policy is already quite accommodative.”

The personal consumption expenditures price index rose 2.1 percent for the 12 months ending March, near the Fed’s 2 percent target for the price measure.

Lacker said “a lot of thought and analysis” went into the decision by the Fed to establish a 2 percent inflation target.

“I am very comfortable with the choice,” he told reporters after the speech. “I don’t think it would be easy to temporarily adopt a higher target and then successfully return to a lower” inflation rate. “In fact, I think it would be very dangerous.”

Economic indicators show the U.S. economy is in a choppy expansion. Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders. The Institute for Supply Management’s factory index climbed to 54.8 last month, the best reading since June. That may indicate the economy is picking up from the 2.2 percent annual pace in the first quarter. The economy grew 3 percent in the final three months of 2011.

Biggest Quarterly Gain

Employers increased payrolls by 635,000 from January through March, the biggest quarterly gain since the first three months of 2006. The pace of hiring slowed in March when employers added 120,000 jobs, the fewest since October.

The Labor Department will release its April jobs report on May 4. Payrolls rose last month by 161,000 jobs, according to economists surveyed by Bloomberg News.

Lacker, 56, has been president of the Richmond Fed since 2004 and is the second-longest serving among all 12 regional bank presidents after Cleveland’s Sandra Pianalto. He was an assistant professor of economics at Purdue University in West Lafayette, Indiana, before joining the Richmond Fed in 1989 as an economist in the research department.