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Fed’s Lacker Says Thresholds Not Useful as Policy Signal

Federal Reserve Bank of Richmond President Jeffrey Lacker said he opposed linking monetary policy to the unemployment rate because no single indicator can provide a “complete picture” of the labor market.

“I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates,” Lacker said in a statement today, referring to the Federal Open Market Committee. “I would prefer to describe in qualitative terms the economic conditions under which our monetary policy stance is likely to change.”

Lacker was the only policy maker to dissent against the FOMC’s Dec. 12 decision to keep the main interest rate near zero as long as the jobless rate remains above 6.5 percent and the outlook for inflation stays at no more than 2.5 percent one or two years in the future.

The central bank also said this week it will keep buying $40 billion in mortgage bonds each month, and will purchase $45 billion in longer-term Treasuries every month after its Operation Twist Program expires at the end of December.

Lacker said he opposed both moves.

“With economic activity growing at a modest pace and inflation fluctuating close to 2 percent -- the Committee’s inflation goal -- further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations,” Lacker said.

The Fed takes on an “inappropriate role” by purchasing mortgage-backed securities and “tilting the flow of credit to one particular economic sector,” he said. Also, “monetary policy has only a limited ability to reduce unemployment,” Lacker said.

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