Fed's Lone Dissenter: Latest Moves Stoke Inflation Risks
The U.S. Federal Reserve's latest policy actions risk stoking inflation and stray into fiscal policy territory, a senior Fed official said on Friday.
Richmond Federal Reserve President Jeffrey Lacker, explaining why he had voted against the Fed's policy actions on Wednesday, also criticized the adoption of numerical thresholds by the U.S. central bank to guide future policy.
"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," he said in a statement, referring to the Federal Open Market Committee.
The Fed on Wednesday said it would keep interest rates near zero while unemployment remained above 6.5 percent, provided that inflation did not rise above 2.5 percent. This replaced a previous commitment to hold rates down until at least mid-2015.
Lacker, who has been a lone dissenter at every Fed meeting this year, said that he welcomed the decision to drop the date-specific language from the Fed's policy statement.
U.S. growth remains tepid and the jobless rate last month was 7.7 percent, down from previous levels but still high by historic standards. Some 5 million Americans have been without work for six months or more.
To speed up hiring, the Fed also decided to maintain its monthly asset purchases of $45 billion of Treasury bonds and $40 billion of mortgage-backed securities, until it saw a substantial improvement in the outlook for the U.S. labor market.
Lacker disagreed with the decision to maintain asset purchases, citing the danger it would fail to ensure price stability while undermining growth.
"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."
Furthermore, he argued buying mortgage-backed bonds meant the Fed was favoring housing over other parts of the economy.
"Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve," he said, adding that trying to influence credit allocation within the economy was a function of fiscal policy.