Tags: fed | Lacker | QE | Prices

Fed's Lacker: QE to Give Only Small Boost While Pushing Up Prices

Monday, 15 Oct 2012 01:07 PM

 

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Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s decision last month to step up record stimulus through bond purchases will probably give the economy just a small boost because inflation may rise.

“Monetary policy is simply unable to offset all of the ways in which various frictions impede the economy’s adjustment to various shocks,” Lacker said Monday in the text of a speech to government and business leaders in Roanoke, Virginia. “The term ‘maximum employment’ in our congressional mandate should therefore be thought of as the level of employment that currently can be achieved by a central bank.”

The Federal Open Market Committee last month announced it will purchase $40 billion a month in mortgage debt, saying it was “concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Lacker dissented at the FOMC’s Sept. 12-13 meeting, extending his string of dissents from every FOMC decision this year.

U.S. central bankers are debating whether additional monetary stimulus would spur the slow economic recovery and help them meet their congressional mandate to achieve maximum employment and stable prices. Unemployment is 7.8 percent and inflation is running below the central bank’s 2 percent target.

William Dudley, FOMC Vice Chairman and New York Fed President, said Monday that monetary policy may be less powerful after a financial crisis because credit standards rise, loan availability shrinks and households focus on reducing debt.

‘Be Aggressive’

Those are reasons “to be aggressive in terms of the policy response,” Dudley said in a speech to the National Association for Business Economics in New York.

Still, the longer-term costs of balance sheet expansion have to be weighed against benefits, Lacker said.

“The benefits of that action are likely to be small, because it’s unlikely to improve growth without also causing an unwelcome increase in inflation,” Lacker said in reference to purchases of mortgage-backed securities. “Adding to our balance sheet increases the risk we will have to move quickly when the time comes to normalize monetary policy and begin raising rates.”

There are some signs that consumers and businesses may be more optimistic now. Before September, the unemployment rate had exceeded 8 percent since February 2009, the longest stretch since monthly jobless figures were first compiled in 1948.

Exceeded Projections

Retail sales in the U.S. rose more than projected in September. The 1.1 percent advance followed a revised 1.2 percent increase in August that was the biggest since October 2010 and larger than previously reported, Commerce Department figures showed today in Washington.

The committee last month didn’t announce a time or amount for the total bond purchases, deciding instead to keep them open-ended and aimed at improving labor market conditions “substantially.”

The FOMC said in its Sept. 13 statement that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” and forecasts it would hold the benchmark rate near zero until at least mid-2015.

“It’s unlikely that we would be able to restore the unemployment rate to its long-run level immediately — within a quarter or two,” Lacker said. “At the same time, there are significant social costs associated with delaying the recovery in labor market conditions too long.”

“The key point here is that simply observing a high unemployment rate does not imply that the Fed’s monetary policy is failing to comply with its congressional mandate, nor does it necessarily mean that monetary policy needs to do more to achieve its goals,” he said.

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

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

 

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