Lacker: Jan-March Reasonable Time Frame for Tapering

ASHEBORO, N.C. — Richmond Federal Reserve Bank President Jeffrey Lacker said Thursday the Fed's policymaking Federal Open Market Committee could begin reducing asset purchases at one of its next three meetings, but said it will depend on the economic data.

A decision to "taper" the $85 billion monthly bond buying should also depend on FOMC perceptions of the "efficacy," as well as the costs of the "quantitative easing" program, Lacker said as he answered questions from the SCORE group of business people.

Lacker was very skeptical of his colleagues' efforts to rhetorically separate asset purchases from the path of the federal funds rate as he took a question from MNI.

Dismayed by the market's reaction this summer to talk of QE "tapering," Fed Chairman Ben Bernanke and other Fed officials have strived to convince markets that a tapering does not imply sooner hikes in the funds rate from near zero.

But Lacker questioned whether that is possible or even desirable.

Referring to a statement in the minutes of the Oct. 30 FOMC meeting about the likely need to reduce asset purchases "in coming months," Lacker said he couldn't speak for his colleagues, but anticipated that purchases will in fact be reduced in "the next several months."

Elaborating, in response to an audience question, he noted the FOMC will be holding meetings in December, January and March and said "sometime in that timeframe is a reasonable time to shift away from the asset purchases."

Lacker, who is not a voting member of the Federal Open Market Committee this year or next, said if it was up to him, the FOMC would have reduced bond buying "awhile ago."

Asked by reporters to elaborate on the timing of tapering, he said the FOMC minutes reference to "coming months" is "about as precise as you can get."

He did echo the FOMC's oft-stated position that "the decision to taper is going to depend on the incoming data."

Minneapolis Fed President Narayana Kocherlakota told MNI Tuesday that decisions on the pace of asset purchases should be based not just on the economic outlook but also on "cost and efficacy" considerations. And the minutes show there was just such a discussion at the October FOMC meeting.

Lacker agreed "cost and efficacy" should be considered, and he said "part of the efficacy calculation is the extent to which we're contributing to improvement in labor market conditions."

Personally, he said he is "not sanguine about efficacy." He said there is "room for honest disagreement" about the costs of QE.

As for differentiating the Fed's conventional and unconventional monetary tools, Lacker said, "it is inevitable that people will draw inferences about the path of short-term interest rates from any change we make to a current policy instrument, including asset purchases."

"I don't think it's reasonable to completely separate them, and I don't think it's desirable," he said.

Since the Fed "has told people" that both asset purchases and eventual hikes in the funds rate are "data dependent," Lacker said "if we change asset purchases it must reflect a sense of the data," so markets "would have a reason to infer" something about the timing of funds rate hikes.

Lacker said Fed officials can always try to persuade markets they are mistaken about the timing of rate hikes, but said, "it's unreasonable to expect a complete disconnect between the expected path of the federal funds rate and asset purchases."

The Richmond Fed chief was skeptical about changing the FOMC's "forward guidance" or other aspects of its policy statement - another topic of discussion at the October meeting.

"The statement includes a lot of language now," he observed, noting that it tries to tell the public "how our policy settings will react to incoming data..."

But he said "it's a finite statement," and "it can never say all one could say."

Lacker said the FOMC has "talked about what else we could say" and about "how to improve communications by providing a fuller sense of how policy will react to incoming data."

However, "the statement right now is pretty complicated and pretty long," he said, "and I think for two reasons we ought to be really cautious about tweaking the forward guidance apparatus."

First, he said, is "the sheer complexity of what we're trying to say."

Second, he said, there is "a matter of credibility... If you go changing what you're saying about how you're likely to behave from time to time you could erode people's confidence."

In other comments, Lacker said one factor fuelling record-setting gains in stock prices is the low interest rates which the Fed has helped engineer on long-term Treasury securities.

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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