Aug. 19 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.

``For my money I would prefer to see them credibly and demonstrably privatized,'' Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.

Treasury Secretary Henry Paulson by contrast has tried to keep Fannie Mae and Freddie Mac in their current form as government-sponsored companies owned by shareholders. Lacker's remarks come as a continued slide in the firms' stocks slide and their borrowing costs climb spur speculation the Treasury will intervene.

Lacker also said that financial-market turmoil shouldn't keep the Fed from raising interest rates to bring down inflation.

``It is important to withdraw this monetary policy stimulus in a timely way,'' Lacker said. ``That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see.''

June Warning

The Richmond Fed president warned in June that the Fed, by creating lending programs to restore credit availability, may prompt investors to take on excessive risk. Central bankers in March opened the discount window to investment banks and loaned $29 billion against a portfolio of Bear Stearns Cos. securities to facilitate a merger with JPMorgan Chase & Co.

Since Lacker made the June 5 speech in London, the Fed has made available the discount window to Fannie Mae and Freddie Mac, two government-chartered companies, and agreed to a streamlined process for taking over failed banks. The central bank has also extended the availability of discount window lending to investment banks until January 2009.

Lacker, 52, heads a district that is home to two of the four biggest U.S. banks, Bank of America Corp. and Wachovia Corp., both based in Charlotte, North Carolina.

Shares of Fannie Mae and Freddie Mac are down more than 90 percent during the past year while spreads on their debt are widening over Treasuries, making it more expensive for the companies to raise capital.

Credit Risk

Five-year swap rates, which partly reflect perceptions of credit risk, rose to 104 basis points yesterday. The spread has traded above 100 basis points in the past year ahead of the unwinding of structured investment vehicles, the collapse of Bear Stearns Cos. and the seizure of IndyMac Bancorp Inc. by the federal bank regulators on July 11.

Fed Bank Presidents Gary Stern and Tom Hoenig have also expressed concerns about the expansion of federal safety nets for financial institutions.

``The too-big-to-fail problem has once again gotten worse,'' Stern said in an Aug. 14 speech in Three Forks, Montana.

Lacker said he expects economic growth of about 1 percent over the next year, hampered by the continued slump in housing. Still, economic weakness shouldn't deter the Fed from its focus on inflation, he said.

No `Lower'

``I certainly don't think the federal funds rate should be any lower given where we are now,'' said Lacker. `Monetary policy is very stimulative right now.''

``We are still in a fairly risky situation'' on the inflation front, he said. On Aug. 12 Lacker said that even if energy prices moderate, he's ``still concerned'' about the ``overall pattern'' of rising prices.

Other Fed bank presidents have voiced concerns about inflation. Dallas Fed President Richard Fisher at the Aug. 5 meeting of the Federal Open Market Committee dissented for a fifth time this year, preferring an increase in interest rates.

The Fed can raise rates without impeding a credit market recovery and such a rate increase may occur sooner than many people expect, Fisher said today. The U.S. may face a ``lingering inflationary fever'' as food and energy costs are passed on by producers, he said.

Lockhart's View

Atlanta Fed President Dennis Lockhart said in an Aug. 15 interview he expected that ``the reasonable policy debate will be around holding versus raising rates.'' If prices don't moderate as he expects, he would back an ``earlier'' increase in rates.

Philadelphia Fed President Charles Plosser said July 23 that policy makers should act before inflation expectations become ``unhinged.''

Lacker, 52, heads a district that is home to Bank of America Corp. and Wachovia Corp., two of the four biggest U.S. banks. A former head of research at the Richmond Fed, he alone dissented in rate votes at the Fed in late 2006, advocating higher rates to stem inflation. He votes again in 2009.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: August 19, 2008 15:41 EDT