Aug. 20 (Bloomberg) -- Jeffrey Lacker became the first Federal Reserve official to clash publicly with the Bush administration's strategy of trying to shore up support for Fannie Mae and Freddie Mac as federally backed private firms.

The comments by the Richmond Fed bank president yesterday followed new evidence that Treasury Secretary Henry Paulson's approach is finding little support from investors. Fannie Mae fell to its lowest level since 1989, while Freddie Mac paid the highest premium in at least a decade at a note sale that saw falling demand from Asian investors and central banks.

``I would prefer to see them credibly and demonstrably privatized,'' Lacker said in a Bloomberg Television interview in Washington. ``And I think a path like what Chairman Greenspan suggested is probably the best path,'' he added. Former Fed chief Alan Greenspan has advocated nationalizing the two largest U.S. mortgage financers, splitting them up and selling them off.

Lacker also said that policy makers shouldn't wait until an end to financial turmoil before raising interest rates to bring down inflation, becoming at least the fourth Fed official to make that point in the past five weeks. Lacker votes on the rate-setting Federal Open Market Committee next year.

``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.''

Rate Outlook

Traders expect no change in rates through year-end, futures prices show. The Fed has reduced its main rate 3.25 percentage points since September, to 2 percent.

``He clearly indicated there are a number of cross currents that would make it more difficult than he would like to see for the committee to come to an agreement that it would be a time to start raising rates,'' said Robert Eisenbeis, chief monetary economist at Cumberland Advisors, and former research director at the Atlanta Fed.

Lacker also said yesterday he would be surprised to see a large U.S. bank fail.

``I am broadly confident in the ability for commercial banks to weather the storm,'' he said. Still, there is ``substantial uncertainty'' around the losses and writedowns that will result from mortgages originated in 2006 and 2007, which could cause ``other shoes to drop,'' he added.

Government Ties

Lacker's comments on Fannie Mae and Freddie Mac echoed the views by some former Fed officials, led by Greenspan, that the companies' links with the federal government ought to be severed. The firms package mortgages into bonds for sale to investors, and traditionally borrowed more cheaply than other companies because of an implicit government backing.

Fed Chairman Ben S. Bernanke told lawmakers last month there are a number of options for Fannie and Freddie over the longer term, ``from outright nationalization, to privatization to breaking them up.'' For now, ``the right solution is to keep them in their current form but to provide very strong oversight that will assure adequate capital,'' he said July 16.

Paulson last month won the authority to inject capital into Fannie Mae and Freddie Mac, in legislation aimed at restoring confidence in the firms. Stocks and bonds issued by the two have since slumped.

The Treasury ``is monitoring market developments vigilantly,'' spokeswoman Jennifer Zuccarelli said in an e- mailed statement. ``We are focused on encouraging market stability, mortgage availability and protecting the taxpayers' interests.''

Washington-based Fannie Mae dropped to $6.01 yesterday, down 69 percent since the start of last month. McLean, Virginia- based Freddie Mac slid to $4.17, a decline of 74 percent.

Debt Sale

Freddie Mac sold $3 billion of five-year reference notes yesterday priced to yield 4.172 percent, or 113 basis points more than Treasuries of similar maturity. Asian investors bought 30 percent, down from 41 percent in a sale of Freddie debt in May, company data showed.

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.

A former head of research at the Richmond Fed, he dissented in Fed votes in late 2006, advocating higher rates to stem inflation. Lacker has also stood out on regulatory matters, warning in June the Fed's expanding safety net for financial firms risked spurring investors to take on excessive risk.

Lacker yesterday said that by taking on too many roles, the U.S. central bank could risk political interference. The Fed in March opened lending to investment banks and agreed to temporary swaps of its Treasuries holdings for hard-to-finance bonds held by Wall Street firms.

``I do see some merits to the argument that adding responsibilities could threaten to dilute the independence'' the Fed needs, he said in a second interview with Bloomberg Radio.

Lacker added that ``I like to approach this with some humility about policy makers' ability to assess where mortgage- backed securities should trade, just as we were genuinely humble about what we could say where tech stocks could trade'' at the end of the last decade.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Kathleen Hays in Seattle at khays$@bloomberg.net

Last Updated: August 20, 2008 00:01 EDT