Bloomberg News

Lacker Says Fed Attempts to Boost Growth May Only Raise Prices

October 17, 2011

Oct. 17 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank risks stoking inflation by trying to boost growth because the recovery is hampered by conditions that are unaffected by monetary policy.

“The factors likely to be restraining growth -- from empty houses to prospective tax rates -- are nonmonetary and largely beyond the power of the central bank to offset through easier monetary conditions,” Lacker said today in the text of a speech to be delivered in Salisbury, Maryland. “History has repeatedly demonstrated that if a central bank attempts to add monetary stimulus to offset nonmonetary disturbances to growth, the result is higher inflation.”

Lacker said he opposed the Fed’s decision last month to push down long-term interest rates by selling $400 billion of short-term Treasury securities and replacing them with the same amount of longer-term bonds, a move known as Operation Twist.

Lacker also said he couldn’t support the decision to reinvest maturing housing debt into agency mortgage-backed securities, saying “it’s simply inappropriate,” for a central bank “to attempt to channel credit toward some economic sectors and away from others.” The Fed had previously allowed its holdings of housing debt to shrink and be replaced by Treasuries.

Lacker’s opposition to further monetary easing aligns him with Minneapolis Fed President Narayana Kocherlakota, Richard Fisher of Dallas and Charles Plosser of Philadelphia, who dissented from the decision to launch Operation Twist. Lacker, who doesn’t vote on policy this year, said the level of dissent does not reflect disrespect among members of the Federal Open Market Committee.

Collegiality on Committee

“In my experience as an FOMC participant since 2004, the Committee has functioned with an exceptional level of collegiality,” Lacker said. “Differences have been aired candidly and respectfully, and the give and take of our debates has strengthened the FOMC’s collective understanding.”

Fed Chairman Ben S. Bernanke this month told the Joint Economic Committee of Congress that the two-year-old recovery is “close to faltering.” He spoke two weeks after the FOMC announced Operation Twist in a bid to push down long-term interest rates.

Lacker said he agreed with the view that the slowdown in the recovery this year is only partly attributable to transitory shocks such as higher oil prices and the earthquakes and tsunami in Japan.

Ebbing Effects

“As this year has unfolded and the effects of these temporary factors have ebbed, it has become apparent that there are more persistent factors impeding growth in this recovery,” Lacker said at the Salisbury-Wicomico Economic Development Annual Meeting.

The world’s largest economy expanded at a 1.3 percent annual pace in the second quarter and 0.4 percent in the first quarter. The Fed meeting and Bernanke’s testimony to Congress came before an Oct. 7 report from the Labor Department showed the economy added 103,000 jobs in September, an improvement from a 57,000 gain recorded in August.

Other recent reports have suggested that the economy is holding up. Industrial production in September increased 0.2 percent, in line with the median estimate in a Bloomberg News survey, after being little changed in August, figures from the Fed showed today. Factory production, which makes up 75 percent of the total, climbed for a third month.

Likely Scenario

“The most likely scenario is for the rate of growth to gradually strengthen during the next two years,” Lacker said. “But I would not be surprised if instead growth remained fairly modest over that horizon; there is enough uncertainty in my mind regarding the current impediments to growth that I cannot rule out a less robust path.”

The FOMC said in its Sept. 21 statement that it anticipates “that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate.” Lacker said by contrast that he was skeptical that inflation would settle below an annual rate of 2 percent.

“I doubt inflation will fall much below 2 percent for a sustained period,” Lacker said. “Moreover, experience coming out of past recessions suggests that the risks to inflation lie to the upside, so I do not believe we should relax our vigilance on inflation at this time.”

Lacker, 56, is a former head of research at the Richmond Fed and oversees a district that is home to the biggest U.S. lender by assets, Bank of America Corp., based in Charlotte, North Carolina. He became president of the Richmond Fed in August 2004.

--Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Joshua Zumbrun in Salisbury, Maryland at

To contact the editor responsible for this story: Chris Wellisz at

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