Fed’s Lacker Says More Stimulus Risks Inflation

       The Federal Reserve’s decision to buy more bonds and implement other such easing measures creates the possibility of raising inflation, Richmond Fed President Jeffrey Lacker said Tuesday.

The central bank said last week it would begin buying an additional $40 billion of mortgage-backed securities a month on an open-ended basis. It also extended its guidance on short-term rates, saying they will remain low through at least mid-2015, revised from the previous estimate of late 2014.

Mr. Lacker was the only member of the Federal Open Market Committee who voted against the policy-making committee’s decision Thursday.

“Further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations,” Mr. Lacker said, addressing the Money Marketeers of New York University in New York. Inflation has been running close to the FOMC’s goal of 2% per year, he said.

“A commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases implies too great a willingness to tolerate higher inflation and would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates,” Mr. Lacker said.

He said he opposed the buying of mortgage-backed securities because such purchases are intended to reduce borrowing rates for conforming home mortgages and this raises the interest rate for other borrowers. “Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve,” he said.

Among the issues impeding economic growth are the housing sector and political gridlock that has “delayed remedies to our unsustainable federal fiscal path” which creates “paralyzing uncertainty,” he said. This has damped investments and hiring for new businesses that would have taken up the economic slack created by one sector’s decline.

Labor-market conditions have been held back by impediments “beyond the capacity of monetary policy to offset,” Mr. Lacker said. “The collapse in housing construction was a huge blow to our economy, and it will take a substantial amount of time for us to recover by shifting labor, capital and spending toward other growth opportunities.”

Given the uncertainty about the economic outlook, Mr. Lacker said everyone would be “watching the incoming data with vigilance.”

Earlier Tuesday, New York Fed President William Dudley expressed strong support for the stimulus program launched by the central bank last week, saying the Fed can do more if it decides the U.S. economy needs the help.

“The decision to ease policy further is fully consistent” with the central bank’s legal mandate to promote maximum sustainable employment while maintaining price stability, Mr. Dudley said. Without the new action, “growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession,” the official said.  

Source: Dow Jones

  • Lacker has been saying this since the Fed first starting easing, what, in 2008? You can go to FRED (or grapple with the BLS web site) to probe the actual record, not a hint of inflation or of the prelude to that, increasing wages, since wages are the biggest cost in the economy.

    I wish he were right: a little bit of inflation would help me and lots of others whose mortgages weigh heavy on the budget. As an economist, though, I’m convinced that he must not look at data, despite the FOMC meeting format that should have him doing so on a regular basis and in detail.