NEWPORT NEWS, Va. — Richmond Federal Reserve Bank President Jeffrey Lacker stressed the Fed's need for independence in determining monetary policy during a speech Thursday at Christopher Newport University in Virginia.
Lacker said the unique structure of the Federal Reserve System, with its 12 regional banks and Board of Governors, provides "independence from political pressures that can induce an excessively short-run focus."
"That independence has been valuable, particularly in keeping inflation under control," Lacker said in prepared text outlining the history of the Federal Reserve. "But it comes with a responsibility to be accountable to our democratic institutions for the results of the conduct of policy."
He said that independence - and the discussion over the type of assets the Fed should hold - have made up most of the debate surrounding the central bank since the 2008 financial crisis, but were the same issues hotly debated when the Fed was founded.
"I believe that the trade-offs and tensions involved are essential for an appreciation of the current debates and how central banking is likely to evolve as we enter our second century," he said.
Lacker says the debate over which assets the Fed should be buying was fueled by the Fed's role in emergency actions immediately following the financial crisis, in what he called "credit policy," not monetary policy.
"Actions that change the composition of the central bank's asset portfolio, but leave the amount of currency and bank reserves unchanged can be thought of as 'credit policy,' since they involve intervening in credit markets by buying one instrument and selling another," he told the audience of mostly Christopher Newport University students.
These emergency actions "had little to do with monetary policy, in this sense, and thus little to do with the original goal of the Federal Reserve Act to furnish an elastic currency," he said.
Through monetary policy, the Fed reduced interest rates to almost zero following the latest recession. "Clearly, though, the Fed could have driven interest rates to zero without the emergency lending programs by simply buying large quantities of Treasury securities," he said.
The mix of assets the Fed bought also didn't matter when it came to driving down rates, he said, referring to the quantitative easing programs implemented by the Federal Reserve, including, most recently, the $85 billion in monthly purchases of longer-term Treasury securities and agency mortgage-backed securities, or MBS.
"The Fed could have expanded its portfolio an equal amount through purchases of Treasury securities only," he said. "Compared to that benchmark policy, buying agency MBS channels funds to mortgage borrowers, financed through sales of Treasury securities to the public."
He added the bank's independence was critical in this respect too. "Aggressive use of a central bank's asset portfolio to channel credit to particular economic sectors or entities threatens dragging the central bank into distributional politics and places that governance arrangement at risk," Lacker said.
"Policymakers should be humble about their ability to identify constructive interventions in particular financial markets," he said.
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