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Lacker Says Rising Federal Debt Poses Challenge for Fed

May 31 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said a projected increase in U.S. government debt during the next decade would complicate policy makers’ efforts to hold inflation within their 2 percent goal.

“Those projections are alarming, and if they come to pass, they could pose significant challenges for monetary policy,” Lacker said in an essay in the Richmond Fed’s 2011 annual report posted online. “Our country could hit what economists call the fiscal limit,” where the government could be forced to default or encourage the central bank to allow an acceleration of inflation.

“Even more disturbing, inflation still could break loose” if the public expected that the Fed would allow prices to rise, Lacker said. Currently, investors retain confidence in U.S. Treasury debt, which is a “bright sign,” he said.

Worries about fiscal policy haven’t set back federal borrowing. The benchmark 10-year Treasury yield fell five basis points, or 0.05 percentage point, to 1.58 percent at 12:42 p.m. in New York amid concern the European debt crisis is worsening.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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