WASHINGTON - Richmond Federal Reserve Bank President Jeffrey Lacker Friday expressed his belief that additional monetary easing by the Fed will not have a significant impact on the stuttering U.S. recovery without fueling inflation at a rate that exceeds the central bank's comfort level.
"A significant increase in inflation could threaten the Fed's credibility and make it more difficult to achieve the Committee's longer-run goals, including maximum employment," Lacker said in a statement explaining his lone dissent against the Federal Open Market Committee decision Wednesday to renew its maturity extension program.
Following its two-day meeting in Washington, the Fed's steering group said it expected growth would pick up "very gradually" over the coming quarters while the stubbornly high unemployment rate would decline "only slowly" towards levels consistent with its mandate.
As a result, the FOMC chose to continue its program -- also known as Operation Twist -- through the end of the year. The Fed estimated that this will result in approximately $267 billion of sales and purchases at the current rate.
"I dissented on this decision because I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable," Lacker said.
The outspoken Richmond Fed chief added that while the outlook for economic growth has clearly weakened in recent weeks, "the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset."
In its policy statement, the FOMC also stressed that, "The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."
That was viewed by Fed watchers as evidence that the door is not closed on more quantitative easing.
But the threat of deflation appears to be the scenario under which Lacker would countenance additional action by the Fed.
He noted that with inflation currently close to 2% -- the Fed's explicit target -- "Should a substantial and persistent fall in inflation emerge, monetary stimulus may be appropriate to ensure the return of inflation toward the Committee's 2% goal."
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