Fed’s Lacker Says Too Much Stimulus Raises Inflation Risk

Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank’s record easing risks fueling a surge in inflation after this year.

“I intend to remain alert for signs that our monetary policy stance needs adjustment,” Lacker said today in a speech in Columbia, South Carolina. “Attempts to overstimulate real economic activity via monetary policy can instead run the risk of raising inflation.”

Fed officials are debating when to end purchases of mortgage bonds and Treasury securities in a program aimed at stoking economic growth and reducing 7.8 percent unemployment. The U.S. generated 155,000 jobs last month, according to a Labor Department report released last week. In addition, gains in wages and the workweek exceeded projections.

“I see material upside risks to inflation in 2014 and beyond, given the current trajectory for monetary policy, though my baseline outlook is for inflation to move toward the Fed’s long-run goal of 2 percent in coming years,” Lacker said in the text of a speech to the annual meeting of the South Carolina Business & Industry Political Education Committee.

Lacker is not a voting member this year on the policy-setting Federal Open Market Committee. His comments were similar to a Jan. 4 speech.

The Richmond Fed president said the central bank can control inflation. He predicted the economy will grow this year at 2 percent, held back by an oversupply of housing, cautious consumers and uncertainty that is restraining business investment and hiring.

‘Continued Stability’

For this year, Lacker said he agrees with private forecasts for inflation to be “a little less than 2 percent.” Current measures of inflation expectations suggest “consumers, business firms and investors anticipate continued stability,” he said.

Lacker told reporters after the speech he didn’t expect “a near-term increase in inflation of very large proportions.” Still, he said he was concerned by the Fed’s decision last month to use inflation forecasts as one of the thresholds for raising rates because forecasts can take some time to adjust.

“We could see inflation pressures emerge, we could see inflation risks emerge and still not trip that inflation trigger” for higher rates, he said. “In early 1994, we moved preemptively” to tighten in the absence of forecast inflation. “Those moves were crucial to us establishing credibility” for the past two decades, he said.

Opposes Program

Lacker told audience questioners he opposed the Fed’s asset-purchase program known as quantitative easing because the likely costs of the plan exceeded the benefits, which appear to be small.

“Several” members of the FOMC said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting released last week. Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard told reporters separately last week that further reductions in unemployment this year could warrant an end to the asset purchase program.

Lacker was a voting member of the committee last year and dissented at every meeting. He said in his dissent last month that Fed asset purchases probably won’t boost growth.

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

The Richmond Fed district includes Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.

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