Lacker Warns Against Unemployment Targeting

CHARLOTTE, N.C. — Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, warned Monday against "steering monetary policy off course" by "targeting unemployment" instead of inflation.

The noted inflation hawk, who is not a voting member of the policymaking Federal Open Market Committee this year or next, minimized the risk of deflation and said that while inflation is "well contained" now, that containment should not be "taken for granted."

Predicting the economy will grow somewhat faster next year, he said firms and households will become less desirous of holding "precautionary" deposits at banks and more inclined to spend. This will require the Fed to provide less liquidity to the banking system if it is to avoid an acceleration of inflation.

Lacker, in remarks prepared for a speech to the Charlotte Chamber of Commerce, warned that expanding the Fed's balance sheet through additional quantitative easing will necessitate "more rapid balance sheet reduction" when it comes time to withdraw monetary stimulus.

Commenting on the FOMC's decision to buy $600 billion in longer-term Treasury securities by the end of the second quarter of next year, Lacker said this additional monetary stimulus was not without risks.

"Historical experience, including the inception of the Great Inflation of the 1970s, suggests that central banks should be careful not to steer monetary policy off-course by targeting the unemployment rate," he said in an apparent reference to the heavy emphasis that Fed chairman Ben Bernanke and other Fed policymakers have been placing on the need to bring down near-double-digit unemployment in recent weeks.

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