Richmond Federal Reserve President Jeffrey Lacker said the shock from the credit crisis may impede efforts by the central bank to quickly bring down unemployment even with the use of record stimulus.
“Monetary policy is simply unable to offset all of the ways in which various frictions impede the economy’s adjustment to various shocks,” Lacker said in a speech yesterday to the Money Marketeers of New York University.
The U.S. jobless rate has been stuck above 8 percent for 43 consecutive months, prompting Chairman Ben S. Bernanke last week to pledge stimulus in the form of bond buying until the labor market improves “substantially,” according to a Federal Open Market Committee statement. The FOMC for the first time didn’t set a limit on the amount the Fed will buy or the duration of purchases.
Federal Reserve Bank of New York President William C. Dudley said in a speech yesterday the new stimulus is vital for boosting “unacceptably slow” improvement in growth. Chicago Fed President Charles Evans said the new bond buying, or quantitative easing, will help the economy weather Europe’s debt crisis and potential tax increases and spending cuts.
Lacker dissented at the FOMC’s Sept. 12-13 meeting, extending his string of dissents from every FOMC decision this year. He said more stimulus “runs the risk of raising inflation.” Lacker said in response to an audience question that he wanted to “stand pat” on current policy.
“The collapse in housing construction was a huge blow to our economy, and it will take a substantial amount of time for us to recover by shifting labor, capital and spending toward other growth opportunities,” Lacker said.
“My assessment is that a reasonably strong case can be made that the natural rate of unemployment that corresponds to the Fed’s maximum employment mandate is now relatively elevated,” Lacker said. “Further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations.”
The FOMC voted to purchase $40 billion a month in mortgage debt and said it was “concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
The FOMC said in its Sept. 13 statement that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” and forecasts it would hold the benchmark rate near zero until at least mid-2015.
“In the absence of further monetary easing, I concluded that growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession,” Dudley said yesterday in a speech in Florham Park, New Jersey. “As a result, unemployment would remain unacceptably high, with economic risks skewed to the downside.”
Bernanke in a press conference following the FOMC’s decision said the lack of payroll growth was a “grave concern.”
A Fed report last week showed industrial production fell 1.2 percent in August, the most since March 2009. Inflation rose 1.3 percent for the 12 months ending July, below the central bank’s target of 2 percent.
“Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy,” Evans said yesterday in a speech in Ann Arbor, Michigan. The Fed’s actions last week “provided a more accommodative monetary policy that can help us achieve such resilience.”
Treasuries rose amid speculation economic growth will fail to fuel job creation, and most U.S. stocks retreated. Ten-year U.S. Treasury yields declined three basis points yesterday to 1.81 percent while the Standard & Poor’s 500 Index declined 0.1 percent to 1,459.32 in New York.
In a statement released by the Richmond Fed explaining his dissent, Lacker said purchases of mortgage-debt should be the responsibility of fiscal authorities.
“Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve,” Lacker said in his statement.
Lacker told reporters after the speech that measuring any impairment on markets from increased Fed purchases of bonds is “difficult to estimate.”
Still, “having an open-ended program rather than a fixed-size program lowers the bar to some extent for stopping the program if inflation pressures should emerge and become destabilizing,” he said. “So that’s a positive feature.”
He said in his statement explaining his dissent that the FOMC’s commitment to continue providing stimulus as the recovery gathers strength was “inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.”
Lacker, 56, has been president of his regional bank since 2004. He was previously the Richmond Fed’s director of research.