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Lacker Says QE to Give Small Boost While Raising Prices

Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s decision last month to step up record stimulus through bond purchases will probably give the economy just a small boost because inflation may rise.

“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 today in the text of a speech to government and business leaders in Roanoke, Virginia. “The term ‘maximum employment’ in our congressional mandate should therefore be thought of as the level of employment that currently can be achieved by a central bank.”

The Federal Open Market Committee last month announced it will purchase $40 billion a month in mortgage debt, saying it was “concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

Lacker dissented at the FOMC’s Sept. 12-13 meeting, extending his string of dissents from every FOMC decision this year.

U.S. central bankers are debating whether additional monetary stimulus would spur the slow economic recovery and help them meet their congressional mandate to achieve maximum employment and stable prices. Unemployment is 7.8 percent and inflation is running below the central bank’s 2 percent target.

William Dudley, FOMC Vice Chairman and New York Fed President, said today that monetary policy may be less powerful after a financial crisis because credit standards rise, loan availability shrinks and households focus on reducing debt.

‘Be Aggressive’

Those are reasons “to be aggressive in terms of the policy response,” Dudley said in a speech to the National Association for Business Economics in New York.

Still, the longer-term costs of balance sheet expansion have to be weighed against benefits, Lacker said.

“The benefits of that action are likely to be small, because it’s unlikely to improve growth without also causing an unwelcome increase in inflation,” Lacker said in reference to purchases of mortgage-backed securities. “Adding to our balance sheet increases the risk we will have to move quickly when the time comes to normalize monetary policy and begin raising rates.”

Lacker said in response to audience questions that unwinding the balance sheet will be a tricky question. The Fed would like to make the exit predictable, although economic conditions may compel the central bank to change what they announce, he said.

Never Before

“We have never done this before,” he said. “We have never been in a tightening cycle where we’re doing it by raising the rate on reserves and selling at the same time.”

Still, any profit or loss the Fed experiences as result of exit or holding a high level of assets now should be “secondary” to policy objectives.

Lacker said picking a variable such as the unemployment rate as a benchmark on when to begin changing monetary policy is difficult because it could be influenced by changes in labor market conditions, such as flows into the work force from people who aren’t working today.

“Labor market conditions are more complicated than any one number can convey,” he said in response to an audience question. “It just doesn’t seem wise to pin everything on a single number” other than the inflation rate which the central bank controls over the long term.

Lacker said he considers the Fed’s 2 percent inflation target as an average over time rather than as a ceiling.

Longest Stretch

There are signs optimism among consumers and businesses may be rising. Before September, the unemployment rate had exceeded 8 percent since February 2009, the longest stretch since monthly jobless figures were first compiled in 1948.

Retail sales in the U.S. rose more than projected in September. The 1.1 percent advance followed a revised 1.2 percent increase in August that was the biggest since October 2010 and larger than previously reported, Commerce Department figures showed today in Washington.

The Standard & Poor’s 500 Index rose 0.4 percent to 1,434.87 at 2:49 p.m. in New York, after the benchmark gauge for American equities slumped 2.2 percent last week. The yield on the benchmark 10-year Treasury note increased 0.01 percentage point to 1.66 percent.

The FOMC last month didn’t announce a time or amount for the total bond purchases, deciding instead to keep them open-ended and aimed at improving labor market conditions “substantially.”

Accommodative Stance

The committee 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.

“It’s unlikely that we would be able to restore the unemployment rate to its long-run level immediately -- within a quarter or two,” Lacker said. “At the same time, there are significant social costs associated with delaying the recovery in labor market conditions too long.”

“The key point here is that simply observing a high unemployment rate does not imply that the Fed’s monetary policy is failing to comply with its congressional mandate, nor does it necessarily mean that monetary policy needs to do more to achieve its goals,” he said.

Lacker, 57, has been president of his regional bank since 2004. He was previously the Richmond Fed’s director of research.

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