COLUMBIA, S.C. — Richmond Federal Reserve Bank President Jeffrey Lacker said Tuesday that the Fed's monetary stimulus efforts won't do much to speed economic growth but could lead to higher inflation.

Lacker, repeating past warnings, said inflation is likely to stay around 2% this year, but foresaw "a material upside risk" beginning next year in remarks prepared for delivery to the South Carolina Business & Industry Political Education Committee.

Lacker, who regularly dissented against monetary stimulus measures adopted by the Fed's policymaking Federal Open Market Committee last year, projected economic growth of only about 2% in the year ahead, but suggested there is little the FOMC can productively do to accelerate it.

He said growth is being impeded by an array of factors, including a continued "substantial oversupply of new homes," consumer caution, "significant uncertainty" about taxes and spending, uncertainty about government regulation and downside risks from Europe.

"This economic expansion, while disappointing, may be the best we should expect given the large decline in the housing market," he said.

Faced with these economic headwinds, Lacker stressed the limitations of monetary policy. "Beyond avoiding the economic damage associated with high and variable inflation, I believe it is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis."

Lacker said he dissented against $85 billion per month of outright asset purchases at the December FOMC meeting because he thought that "further monetary stimulus is unlikely to materially increase the pace of economic expansion, and that these actions will test the limits of our credibility."

"At some point, we will need to withdraw stimulus by raising interest rates and reducing the size of our balance sheet, and the larger our balance sheet, the more vulnerable we will be to seemingly minor miscalibrations in policy," he said. "Accordingly, I see an increased risk, given the course the Committee has set, that inflation pressures emerge and are not thwarted in a timely way."

He vowed to "remain alert for signs that our monetary policy stance needs adjustment."

Lacker said there are "material upside risks to inflation in 2014 and beyond, given the current trajectory for monetary policy."

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

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.