Richmond Federal Reserve Bank President Jeffrey Lacker warned Friday that the Fed is taking undue inflation risks -- both with its asset purchases and with the quasi-commitment to sustained low interest rates it is making through its communications strategy.
Lacker, who has been the lone dissenter on the Fed's policymaking Federal Open Market Committee all year, doubted the third round of "quantitative easing" would do much good and said the concentration on buying mortgage-backed securities is an unwarranted "allocation of credit" by the central bank.
He also expressed strong dismay with the FOMC's declaration that it will hold rates down at very low levels even after the economy starts growing more rapidly.
The FOMC is flirting with inflation, he suggested.
At the conclusion of two days of meetings Wednesday, the FOMC made no change in policy after taking aggressive actions Sept. 13. The Fed reaffirmed that it will continue to buy $40 billion of MBS a month until it sees "substantial" labor market improvement, and will continue its $45 billion a month "Maturity Extension Program" (Operation Twist) through the end of the year.
The FOMC also repeated its expectation that the federal funds rate will stay within a target range of zero to 25 basis points "at least through mid-2015." And the FOMC again said it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."
The Fed statement said Lacker had "opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted."
That was a bit different than the FOMC's description of his previous dissent -- that he favored the omission of the "mid-2015" time period.
Elaborating on his latest dissent, Lacker said he objected to the FOMC's stance on three counts.
First, he said he "opposed continuing additional asset purchases" because "further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it's also likely to cause an unwanted increase in inflation."
Lacker noted that "economic activity has been growing at a modest pace, on average, and inflation has been fluctuating around 2%, which the Committee has identified as its inflation goal."
He acknowledged that "unemployment does remain high by historical standards," but said "improvement in labor market conditions appears to have been held back by real impediments that are beyond the capacity of monetary policy to offset."
"In such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations," he warned.
Inflation risks could be further enhanced by the Fed's plan to hold the federal funds rate near zero even after the economy picks up steam, Lacker warned.
Second, Lacker said he "dissented because I disagreed with the characterization of the time period over which the stance of monetary policy would be highly accommodative and the federal funds rate would be exceptionally low."
"I read the Committee statement as saying that the federal funds rate will be exceptionally low for a considerable time after we observe a marked increase in the growth of employment and output," he said.
"I do not believe that a policy conforming to this characterization would be appropriate, because it implies providing too much stimulus beyond the point at which rate increases will be required to keep inflation in check," he said. "Such an implied commitment would be inconsistent with a balanced approach to the FOMC's price stability and maximum employment mandates."
Lacker said he does "believe that it is useful for the Committee to characterize economic conditions under which policy would be likely to change in the future." But "specific calendar dates are a highly imperfect way of doing so."
Third, reiterating his longstanding position that any asset purchases should take the form of Treasury securities, Lacker said he "strongly opposed purchasing additional agency mortgage-backed securities."
Buying MBS "can be expected to reduce borrowing rates for conforming home mortgages by more than it reduces borrowing rates for nonconforming mortgages or for other borrowing sectors, such as small business, autos or unsecured consumer loans," he said.
"Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve," he went on.
Lacker cited a Joint Statement of the Department of Treasury and the Federal Reserve issued on March 23, 2009, which said, "Government decisions to influence the allocation of credit are the province of the fiscal authorities."
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