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Fed’s Lacker Opposes Linking Policy to U.S. Unemployment

November 20, 2012

Federal Reserve Bank of Richmond President Jeffrey Lacker said he opposes a proposal to tie central bank stimulus to the U.S. unemployment rate because such a move may spur inflation.

“Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do not always capture the rich array of policy-relevant information about the state of the economy,” Lacker said today in a speech in New York.

Lacker’s comments highlight the challenge to Fed officials as they try to find a consensus on new ways to provide a forecast for monetary policy. Measures such as inflation and the unemployment rate could augment or replace the Fed’s current commitment to keep the main interest rate near zero through at least mid-2015.

Policy makers “generally favored” an approach linking the duration of record-low interest rates to “economic variables,” according to minutes of their Oct. 23-24 meeting released last week. Four Fed policy makers have backed this plan, which was first proposed by Chicago Fed President Charles Evans last year.

“This approach would place great weight on a single indicator of labor market conditions, one that can easily lead you astray,” Lacker said at the Shadow Open Market Committee Symposium. The panel is a group of independent economists who meet to evaluate the Fed’s policy choices.

“This risk seems particularly germane now,” he said, given “the difficulty of disentangling the trend and cyclical components” of a decline in participation in the labor force.

Constrain Credit

The Richmond Fed chief said Congress may need to constrain Fed credit policy should the central bank not set such limits itself.

“If the Federal Reserve cannot limit credit policy of its own accord, legislation may be the best option,” he said. “And the restraint of credit policy would not be complete unless limits on reserve bank lending are complemented by limits on the Fed’s ability to buy private sector assets.”

During an audience question period, Lacker said Fed stimulus would be unable to bring about a faster recovery without risking a loss of price stability.

“Monetary policy is not likely to be able to raise growth rates very significantly now,” Lacker said. And if it were to, “I doubt” it could do so “without raising inflation.”

The Richmond Fed leader also warned that with further expansion of the Fed balance sheet, “the riskier the exit becomes” from record stimulus. “ That is something we need to think carefully about,” Lacker said.

Held Back

The recovery has been held back by a combination of consumers who “seem awfully cautious” and have “hunkered down” following the recession three years ago as well as businesses facing uncertainty in government regulatory and tax policy, he said.

The S&P 500 fell less than 0.1 percent to 1,386.69 at 10:24 a.m. in New York. The Dow Jones Industrial Average dropped 22.84 points, or 0.2 percent, to 12,773.12.

Lacker was the only policy maker to cast a dissenting vote at the Federal Open Market Committee’s Oct. 23-24 meeting in which officials maintained $40 billion in monthly purchases of mortgage-backed securities and affirmed their zero-interest-rate forecast. He has dissented from every FOMC decision this year.

There is “ample room for skepticism about the effect of the Fed’s asset purchases,” Lacker said, adding the movement of Treasury yields around the time of policy announcements has been “ambiguous.”

Repeated Criticism

Lacker said interventions into the housing market “may be contributing to the perception that Federal Reserve credit policy is adrift.”

The Fed president repeated his criticism of purchases of mortgage-backed securities as a “credit market intervention” that improperly favors one industry, housing, over others such as small businesses.

In addition, purchasing mortgage securities may encourage a continued reliance on government-sponsored agencies, when “the housing sector would be better served by a new model that relies less on government credit subsidies,” Lacker said.

Chicago Fed President Charles Evans has proposed holding interest rates near zero until unemployment falls to 7 percent so long as inflation does not breach 3 percent. Minneapolis Fed President Narayana Kocherlakota has suggested continuing with zero rates until unemployment falls to 5.5 percent so long as inflation remains below 2.25 percent.

Critical Presidents

Other Fed presidents have been critical of the idea. Philadelphia Fed President Charles Plosser last week said thresholds could “create more confusion than clarity,” while St. Louis Fed President James Bullard said last month that tying policy to unemployment “is a mistake” because the jobless rate doesn’t necessarily give a complete measure of the labor market’s health.

Additional bond purchases may complicate an eventual exit from record stimulus and risk a surge in inflation, Lacker said last week in Charleston, West Virginia.

Lacker, 57, has been president of his regional bank since 2004. He was previously the Richmond Fed’s director of research.

To contact the reporters on this story: Steve Matthews in Atlanta at;

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

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