Lacker Says Separating Fed Rate Guidance From QE Is Impossible

Federal Reserve Bank of Richmond President Jeffrey Lacker said fully separating guidance on when the central bank will end asset purchases from when it will raise interest rates is impossible because both depend on what economic reports show.

“It’s unreasonable to expect a complete disconnect between asset purchases and the expected interest rate path,” Lacker, who doesn’t have a vote on policy, told reporters today in Asheboro, North Carolina. “I don’t think it’s feasible to completely separate them and I don’t think it would be desirable either.”

It’s “inevitable” investors will draw inferences about the path of the fed funds rate based on any change central bank officials make to bond buying or other policies, Lacker said. Because the Fed says rates and purchases both will be “data dependent,” then it follows that changes to the purchases known as quantitative easing reflect shifts in economic data that also affect rates, he said.

Lacker spoke after minutes of the Oct. 29-30 Federal Open Market Committee meeting released yesterday signaled policy makers may taper their $85 billion in monthly bond buying “in coming months” if the economy improves as anticipated. The Fed’s challenge in slowing the purchases will be doing so without causing a jump in interest rates.

U.S. Unemployment

The FOMC has said it will hold rates near zero at least as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. The U.S. unemployment rate was 7.3 percent in October.

Lacker also said Fed communication risks becoming muddled. The FOMC statement, which it releases after each of the panel’s eight meetings per year, “right now is pretty complicated and pretty long,” and includes a “lot of language” to show how policy will react to economic data, Lacker said.

Fed officials at their last gathering in Washington debated several ways to change how the central bank telegraphs to investors and the public how it will shift monetary policy.

“The spirit of the discussion last time was whether we could improve communications by providing a fuller sense to how policy is going to react to incoming data,” Lacker said today. Officials should be “really cautious about tweaking the forward guidance apparatus” because the message is complex and changes may erode the Fed’s credibility, he said.

“If you go changing what you are saying about how you are likely to behave from time to time you could erode people’s confidence that you are going to follow through on what you say you’re going to do,” the Richmond Fed chief said.

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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