Fed’s Lacker Says Economy May Warrant Earlier Rate Increase

Federal Reserve Bank of Richmond President Jeffrey Lacker
Federal Reserve Bank of Richmond president Jeffrey Lacker. Photographer: Jay Paul/Bloomberg

Federal Reserve Bank of Richmond President Jeffrey Lacker said interest rates may need to rise before late 2014 to prevent an increase in inflation.

“I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for so long,” Lacker said in a statement on the Richmond Fed’s website explaining his dissent from the central bank’s Jan. 25 decision to pledge keeping its benchmark interest rate near zero “at least through late 2014.”

“I expect that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures,” he said.

Fed Chairman Ben S. Bernanke has been unable to forge unanimity on the Federal Open Market Committee since June, as decisions have drawn objection from five policy makers both in favor and opposed to further stimulus.

Lacker this week objected to the Fed’s decision to extend its previous pledge to keep borrowing costs low at least until the middle of 2013. The Fed pushed the rate close to zero in December 2008 and has since engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy and reduce the jobless rate, which stood at 8.5 percent in December.

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the FOMC said in its statement. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Other Objections

Lacker said he also objected to including a time period for the first interest rate increase in the FOMC’s statement, and said such information could better be provided in the central bank’s Summary of Economic Projections.

After the two-day meetings at which policy makers update their forecasts, a statement is released at around 12:30 p.m. A table and charts showing policy makers forecasts for inflation, gross domestic product, the unemployment rate and the Fed’s target rate are released at 2 p.m. The complete forecasts and explanatory text are published after a three-week lag, along with the minutes of the meeting.

“My dissent also reflected the view that statements about the future path of interest rates are inherently forecasts and are therefore better addressed in the SEP than in the Committee’s policy statement,” said Lacker, who became a voting member of the FOMC this month as part of a rotation among the Fed’s 12 regional presidents.

‘On the Table’

Bernanke, speaking at a news conference after the statements, said that the option of further large-scale bond purchases is still “on the table.”

“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” Bernanke said.

At Fed meetings in November and December, Chicago Fed President Charles Evans dissented, favoring further accommodation to boost the economy. In August and September, Philadelphia’s Charles Plosser, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis opposed decisions to add monetary stimulus.

Lacker, 56, became president of the Richmond Fed in 2004 after five years as director of the regional bank’s research department. He has dissented from six previous decisions of the FOMC, most recently when he opposed its decision in November to arrange currency-swaps with other central banks and to lower the pricing on temporary U.S. dollar swap arrangements by 0.5 percentage point.

Lacker said the program “amounts to fiscal policy, which I believe is the responsibility of the U.S. Treasury.”

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