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Fed’s Bond Program May Complicate Exit, Lacker Says

Federal Reserve Bank of Richmond President Jeffrey Lacker said the purchases of $600 billion in U.S. Treasuries risk spurring inflation in a few years and may make it harder for the Fed to eventually withdraw the stimulus.

“Further balance sheet expansion now could require more rapid balance sheet reduction later on, complicating the withdrawal of monetary stimulus when it becomes necessary to maintain price stability,” Lacker said today in a speech in Charlotte, North Carolina. “It is appropriate” to regularly review the purchases, he said.

Policy makers meet next week to review their plan to buy Treasuries through June and expand record stimulus in a bid to reduce 9.8 percent unemployment and keep inflation from dropping.

The Fed may expand its bond purchases beyond the initial $600 billion, depending on the outlook for the economy and inflation, Chairman Ben S. Bernanke said in an interview with CBS Corp.’s “60 Minutes” program broadcast yesterday. He is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness from close to a 26-year high.

“The provision of further monetary stimulus at this point in the business cycle is not without risks,” Lacker said. “Historical experience, including the inception of the Great Inflation of the 1970s, suggests that central banks should be careful not to steer monetary policy off course by targeting the unemployment rate.”

Risks Outweigh Benefits

Lacker’s concern echoed his remarks in a Bloomberg News interview on Dec. 1 in which he said he had opposed the purchases because the risks outweighed the benefits. He told reporters after his speech that it was “too early to say” how well the bond purchase program was working.

Lacker said in his speech he expects a gradual recovery in the economy next year, with growth “a bit higher” than the consensus expected by economists of about 3 percent.

“This is a cautious outlook calling for a gradual, measured increase in the pace of economic growth, and a modest decrease in unemployment,” he said. “In the last few months, we’ve seen an improved rate of expansion in consumer spending” that should accelerate in coming months.

“The economy is self sustaining,” Lacker said to reporters. “It is very sluggish, but the economy is moving ahead under its own steam.”

Barely Moving Forward

In contrast, Bernanke said in the interview broadcast yesterday that the recovery was just barely moving forward at a sustainable pace.

The European debt crisis probably won’t have much effect on U.S. growth, Lacker said in response to an audience question. “The magnitude of the likely fallout to the United States economy is relatively manageable and relatively minor.”

The U.S. unemployment rate rose to 9.8 percent in November and payrolls increased by 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, Labor Department figures showed on Dec. 3.

While inflation is “well contained” for now, “this favorable inflation picture should not be taken for granted,” he said in his speech.

The Fed’s preferred price measure, which excludes food and fuel, was up 0.9 percent from a year earlier in October, the smallest gain since records began in 1960. Fed policy makers have a long-run goal of 1.6 percent to 2 percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices.

Tricky Timing

“I’m 100 percent confident we can raise interest rates and can reduce stimulus by drawing down bank reserves,” Lacker told reporters after his speech. “Getting the timing right is tricky.”

The Fed has faced political criticism since its decision to buy more Treasury securities.

Representative John Boehner, nominated to be speaker of the U.S. House, and three other Republicans sent Bernanke a letter Nov. 17 expressing “deep concerns” about a policy they said risked weakening the dollar and fueling asset bubbles. A letter from 23 people, including former Republican officials and economists, urged the Fed to end the program early, asserting that it will cause prices to surge.

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