Richmond Federal Reserve Bank President Jeffrey Lacker Friday renewed his warnings that the Fed's prolonged asset buying could drive up inflation and unhinge inflation expectations.

Lacker, who has been the lone dissenter on the Fed's policymaking Federal Open Market Committee all year, issued a statement praising the FOMC for discontinuing the use of specific calendar date for signaling how long it will keep the federal funds rate near zero, but deplored the use of an unemployment threshold for doing so.

He also reiterated his opposition to buying mortgage-backed securities as a form of central bank credit allocation.

Lacker's comments come less than two days after the FOMC announced two major monetary policy initiatives Wednesday. It fully replaced the $45 billion of expiring "Operation Twist" Treasury bond purchases, financed by sales of short-term Treasuries, with outright purchases of the same amount, financed by creation of new bank reserves.

When added to the $40 billion a month of mortgage-backed securities it has been buying since September, that means the Fed will continue doing $85 billion a month of "quantitative easing" indefinitely in 2013.

Second, the FOMC announced for the first time it will use economic conditions, instead of a calendar date, for signaling how long it will keep the federal funds rate near zero. It set thresholds of 6.5% for unemployment and 2.5% for inflation.

In a statement released by the Richmond Fed, Lacker said he "disagreed with the Committee's decision to continue purchasing additional assets to stimulate the economy."

"With economic activity growing at a modest pace and inflation fluctuating close to 2 percent - the Committee's inflation goal - further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations," he said.

Lacker also objected to the continued MBS purchases, saying, "the FOMC should confine its purchases to U.S. Treasury securities."

He acknowledged that MBS purchases will likely reduce mortgage rates, but said, "Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve."

"As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, 'Government decisions to influence the allocation of credit are the province of the fiscal authorities,'" he said.

Lacker has long favored replacing an announced calendar time table for Fed rate hikes with economic conditions in its "forward guidance" on the path of the funds rate. And so he said he "supported the decision to drop such language at the December meeting."

He went on to "agree that it's useful for the Committee to describe how its future actions are likely to depend on the evolving state of the economy."

"However," he added, "monetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions."

"Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC's price stability and maximum employment mandates," Lacker said.

He said he "would prefer to describe in qualitative terms the economic conditions under which our monetary policy stance is likely to change."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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