Lacker Says Fed Bond Buying Has Few Benefits and Risks Inflation

Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s third round of bond buying will increase inflation risks and complicate the pull- back from record stimulus while not fueling economic growth.

“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 today in remarks prepared for a speech at the University of Virginia in Charlottesville. “Adding to our balance sheet increases the risks we’ll have to move quickly when the time comes to normalize monetary policy and begin raising rates.”

The economy is recovering at a “relatively sluggish” pace, and the decline in unemployment “has been disappointingly slow,” Lacker said today to students, faculty and business leaders. Low housing demand, shaken consumer confidence and “political gridlock” among lawmakers unable to agree on a federal budget plan are inhibiting the expansion, he said.

Lacker, who has dissented against every Federal Open Market Committee decision this year, has said he opposed new asset purchases because allocating credit is the responsibility of Treasury or Congress. The Fed last month said it will purchase $40 billion in mortgage bonds a month and hold the main interest rate near zero until at least mid-2015.

The Fed’s third round of quantitative easing, announced Sept. 13, has no end date or fixed total amount, unlike the first two programs of bond buying. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

Initial Claims

A report from the Labor Department yesterday showed that initial claims for unemployment benefits declined last week to a four-year low, which may have reflected difficulty adjusting the data for seasonal swings. The jobless rate unexpectedly fell in September to 7.8 percent, the lowest since President Barack Obama took office in January 2009.

The world’s largest economy expanded at a 1.3 percent pace from April through June, slower than a prior estimate of 1.7 percent, after growing at a 2 percent rate in the first quarter. Economists predict gross domestic product will grow 1.8 percent in the third quarter and 1.9 percent in the fourth, according to the median of 92 estimates in a Bloomberg survey.

Lacker said in Sept. 15 statement that he “strongly opposed” buying more mortgage bonds because the purchases will “distort investment allocations and raise interest rates for other borrowers.” He said that “channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve,” according to the statement.

Record Stimulus

Also last month, the Fed district bank chief said that even the central bank’s use of record stimulus may not be enough to cut the jobless rate because of the severity of the shock from the credit crisis. Monetary policy can’t offset how “various frictions impede the economy’s adjustment to various shocks,” Lacker said in a Sept. 18 speech in New York.

Lacker, 56, dissented four times in 2006 in favor of higher interest rates. He has been president of the reserve bank since 2004 and previously was its director of research. The Richmond Fed district includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia.

To contact the reporter on this story: 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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