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Fed's Lacker Says Operation Twist Won't Help Growth, Jobs

Federal Reserve Bank of Richmond President Jeffrey Lacker said he dissented from the Fed’s $267 billion extension of its Operation Twist program believing it would spur inflation and not significantly help the economy.

“I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable,” Lacker said in a statement today from the Richmond Fed.

Central bank officials on June 20 downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy. Lacker opposed the Fed’s announcement that it will swap short-term Treasury securities with longer-term debt in an effort to hold down borrowing costs. He has dissented from all four Federal Open Market Committee decisions this year.

“While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset,” Lacker said.

The Richmond Fed Chief previously opposed Fed statements this year because he said it may be necessary to raise interest rates before the late-2014 timeframe the central bank set out in January. The Fed lowered its target rate to near zero in December 2008.

The FOMC’s announcement this week was an extension of an existing program that was announced Sept. 21 and would have expired this month. Under the program the Fed was selling $400 billion of short-term government debt and replacing it with the same amount of longer-term Treasuries.

Stocks Fell

U.S. stocks fell on the day of the Fed’s announcement and tumbled further yesterday, driving the Standard & Poor’s 500 Index to the second-biggest loss of the year. Commodities entered a bear market while Treasuries and the dollar rallied as reports on global manufacturing fueled concern the economy is slowing.

Borrowing costs have fallen since the Fed announced Operation Twist last year. The yield on the 10-year Treasury note fell to a record low 1.4387 on June 1. The yield has since risen to 1.62 percent.

Lacker said that inflation remains close to the central bank’s 2 percent goal. Prices rose 1.8 percent in the year through April according to the Department of Commerce’s personal consumption expenditures index which the Fed prefers. Excluding food and energy, prices were up 1.9 percent from a year ago, according to the index.

‘Persistent Fall’

“Should a substantial and persistent fall in inflation emerge, monetary stimulus may be appropriate to ensure the return of inflation toward the Committee’s 2 percent goal,” Lacker said.

The Fed must remain vigilant about its goal for prices because “a significant increase in inflation could threaten the Fed’s credibility and make it more difficult to achieve the Committee’s longer-run goals, including maximum employment,” he said.

Lacker, 56, became a voting member of the FOMC in January as part of a rotation among the Fed’s 12 regional presidents. He became president of the Richmond Fed in 2004 after five years as director of the regional bank’s research department.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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