Inflation should be the guiding light for the Federal Reserve's monetary policy decisions and the central bank needs to consider whether it has injected too much stimulus into the economy, Richmond Federal Reserve Bank President Jeffrey Lacker said Thursday.

Lacker also said he believes broker-dealers "are an issue of very special concern," during an appearance at the Council for Foreign Relations in New York.

The Fed's policies are designed to boost growth by encouraging investors to take more risk, and Lacker said that "the real question is whether we've gone too far or not."

The Fed is currently buying $85 billion a month in U.S. Treasury securities and mortgage bonds, and has vowed to continue doing so until it sees a substantial improvement in the outlook for labor market conditions. Lacker does not hold a voting position on the policy-setting Federal Open Market Committee this year.

With regard to whether the Fed has done too much or too little, Lacker said - from a central banker's point of view - the bottom line has to come down to the purchasing power of money.

"Are we going to cause too much inflation," he said.

Most of criticism of the Fed's role in fueling the pre-crisis housing bubble focused on the central bank keeping interest rates too low between 2003 to 2004, but Lacker noted that inflation averaged 3% between 2004 and 2007.

"On that score I think we can be criticized," Lacker said. "If you are going to argue that interest rates were too low, you should look at inflation - not whether some particular sector expanded too rapidly."

On the subject of broker-dealers, Lacker echoed a view shared by Boston Federal Reserve Bank President Eric Rosengren, who declared at a conference in New York last month: "I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted."

In Rosengren's opinion, "consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions, which have deposit insurance and pre-ordained access to the central bank's Discount Window."

Lacker agreed that they deserve "special attention," especially given the central role firms such as Bear Stearns and Lehman Brothers played in the 2008 financial crisis.

The Richmond Fed chief is also in favor of increasing capital requirements for broker-dealers, saying, "I certainly see great advantages in larger capital buffers."

With regard to broader capital standards, such as Basel III, Lacker said regulators are still "sorting through" the regulatory reform process - although the question of whether these requirements are sufficient is "an open question."

Commenting on current lending conditions, Lacker said the supply of credit is out there, noting that banks are fighting "tooth and nail" for "credible borrowers."

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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