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Lacker Says Fed’s Operation Twist Won’t Spur U.S. Employment

Federal Reserve Bank of Richmond President Jeffrey Lacker. Photographer: Brendan Hoffman/Bloomberg
Federal Reserve Bank of Richmond President Jeffrey Lacker. Photographer: Brendan Hoffman/Bloomberg

Oct. 4 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said last month’s move to reduce long-term interest rates is unlikely to spur a job market hampered by uncertainty over fiscal policy and government regulation.

“I tend to think it would cause higher inflation and have only a transitory or fleeting effect on growth,” Lacker said yesterday in response to audience questions after a speech in Madison, Wisconsin.

Fed Chairman Ben S. Bernanke said last week the U.S. is facing “a national crisis” with the jobless rate at around 9 percent since April 2009. The European debt crisis, political haggling in the U.S. and a plunge in stock prices have prompted a drop in consumer and business confidence that may hurt spending and hiring. Bernanke is scheduled to testify today to a congressional panel about the economic outlook.

Policy makers voted Sept. 21 to push down mortgage and other loan rates in bid to spur growth and employment. The Fed plans to do so by extending maturities of the Treasuries in its portfolio, buying $400 billion of long-term debt and selling an equal amount of shorter-term securities.

“There are impediments to growth that somewhat lower longer-term interest rates would not be the antidote for,” Lacker said of the policy, known as Operation Twist. “Our role is fairly limited in terms of increasing growth.”

Employment Barriers

Lacker identified several barriers to higher employment, including businesses’ uncertainty about environmental and labor regulation, concern about tax and fiscal policy, extended unemployment benefits and a mismatch between employers’ needs and workers’ skills.

“My sense of Operation Twist is if it has economic effects, it is more likely to raise inflation that it is to measurably raise growth,” Lacker told reporters after his speech. “I would not have supported it.”

Lacker doesn’t vote on policy this year under the Fed’s rotating system. Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the decision last month. They “did not support additional policy accommodation at this time,” the Fed statement said.

The Richmond Fed leader spoke after the Standard & Poor’s 500 Index fell to a more than one-year low yesterday on concern Europe’s debt crisis will worsen. The index dropped 2.9 percent to 1,099.23 in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.77 percent from 1.92 percent late on Sept. 30.

Lacker told reporters he is confident in the staying power of the two-year-old U.S. economic recovery.

Low Chance of Recession

“The chance of recession looks low now to me,” he said. “Broadly speaking, the data flow has been disappointing, but still consistent with economic growth at a moderate pace.”

Economists have cut their forecasts for growth, according to a Bloomberg News survey taken from Sept. 2 to Sept. 7. The median forecast calls for a 1.8 percent annual pace of expansion in the third quarter, down from 2.1 percent in the previous month’s survey. Growth next year is forecast to average 2.2 percent, down from 2.4 percent.

Reports yesterday showed manufacturing unexpectedly accelerated in September and construction spending climbed in August.

Earlier data, including stagnant payrolls in August, plunging consumer confidence and falling home values, have pointed to slower growth.

The Richmond Fed leader said he has become more concerned about inflation, which now appears to be above the Fed’s target. High unemployment may do little to push down prices, he said.

‘Little Too High’

“Inflation is above where we would all like to see it,” Lacker said. “I don’t see the amount of slack in the economy providing me much comfort.”

The Fed’s preferred price gauge, which excludes food and fuel, was up 1.6 percent over the past 12 months, Commerce Department figures showed Sept. 30.

Two Fed officials last week said they continue to be on guard against inflation. Governor Sarah Bloom Raskin said the central bank’s use of its policy tools has been “completely appropriate,” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates.

St. Louis Fed President James Bullard said faster inflation won’t stem the housing glut and “monetary policy is ultra-loose right now, and appropriately so.”

Tolerating Inflation

Lacker disagreed with the view, voiced by Chicago Fed President Charles Evans, that the Fed should consider allowing higher inflation for a time to accelerate growth and bring down unemployment.

“Tolerating even on a temporary basis higher inflation in an effort to reduce unemployment is something we have tried before and it has failed,” he said. “It would set a precedent which would hamper our credibility for decades to come.”

Lacker, 56, who attended the University of Wisconsin, is a former head of research at the Richmond Fed and heads a district that is home to the biggest U.S. lender by assets, Bank of America Corp., based in Charlotte, North Carolina.

To contact the reporter on this story: Steve Matthews in Atlanta at

To contact the editor responsible for this story: Chris Wellisz at

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