Fed’s Lacker: 6.5% Jobs Target Risky, Will Take Years to Reach

Monday, 17 Dec 2012 01:25 PM

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The Federal Reserve has set a 6.5 percent unemployment-rate target for when it feels it can consider raising currently rock-bottom interest rates, although such a move is a rather risky one, according to one U.S. central banker.

A 6.5 percent unemployment rate won't come for another three years, said Federal Reserve Bank of Richmond President Jeffrey Lacker, who added pegging a specific unemployment rate to when interest rates may tighten wasn't his preferable course of action.

"I see unemployment coming down to the low 7 [percent range] sometime after next year, in 2014 or so," Lacker told CNBC. "It could take a while to get back to 6.5 percent."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed's benchmark lending rate, the fed funds rate, is currently set at a 0.25 percent target, where it will stay until unemployment rates approach 6.5 percent from the 7.7 percent rate reported for November.

The Fed added that interest rates would stay at those levels also if inflation rates stay below 2.5 percent.

The Fed's move to peg interest rates to specific inflation and unemployment targets is a first, as in the past, the U.S. central bank has used calendar dates as a weather vane, pointing out that economic conditions meriting loose policies will stick around through 2015.

Lacker, a known inflation hawk who often dissents on Federal Open Market Committee decisions, said he would have preferred a more qualitative approach to conveying the timing of policy shifts to the markets as opposed to specific indicators, pointing out that the country can fixated on the rate itself.

Targeting also takes away flexibility when addressing monetary policy.

"I would have preferred a qualitative approach to describing conditions under which we're likely to start raising rates," he said.

"A numerical threshold for unemployment is risky for a couple of reasons. First, because no one statistic can really capture everything we think is going on in the labor market. The unemployment rate can fall for bad reasons. It can stay high even though the labor market is improving pretty dramatically," Lacker added.

"It's inappropriate for the central bank to set a target for the unemployment rate or for a labor market outcome because that's determined by things that are largely outside the control of the central bank."

On top of pegging interest rate moves to unemployment and inflation targets, the Fed also ramped up a bond-purchasing program to jolt the economy.

Specifically, the Fed will buy $45 billion in Treasury holdings a month held by banks on top of another $40 billion in mortgage debt purchased each month from the country's financial institutions, a move that floods the economy with liquidity in a way to encourage investing and hiring.

Other noted market participants say the Fed's monthly purchases of U.S. government debt gives the Treasury Department greater ease to borrow and spend.

“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury,” Bill Gross, founder of fund giant Pimco, told Bloomberg.

“It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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