Fed's Lacker: Easing would stir inflation: report

WASHINGTON (Reuters) - Further monetary stimulus from the Federal Reserve would fuel inflation without doing much to lower unemployment, one of the central bank's most inflation-focused hawks told the Financial Times.

"My sense is that more monetary stimulus at this point would likely show up almost entirely in higher inflation with very little constructive influence on growth," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in an interview published on the paper's website on Monday.

Lacker spoke before the August jobs report, published Friday, showing U.S. employers added no new jobs last month, the newspaper said. The data is likely to bolster the case among Fed officials for further monetary easing.

The Fed is confronting an economic recovery that appears to be stalling, and policymakers will debate options to spur growth at a meeting September 20-21. Fed Chairman Ben Bernanke's decision in late August to extend the meeting to two days from one signaled that concern about the outlook was already heightened.

Fed officials are divided over the need for more stimulus, and Lacker, who is not a voter this year on the rate-setting Federal Open Market Committee, signaled he was among those who opposed measures such as replacing short-term securities with longer-term bonds on the Fed's balance sheet in a bid to drive down longer-term interest rates.

The Fed cut benchmark short-term rates to near zero in December 2008, and since then has turned to unorthodox tools to boost growth. It bought $2.3 trillion worth of longer-term bonds in two installments ending in June, and in August said it would hold benchmark rates at rock-bottom levels if necessary through the middle of 2013.

Although three Fed officials dissented against the August move, hawks like Lacker are likely to be under increased pressure to accept further easing after the August jobs report.

Unemployment remained stuck at a lofty 9.1 percent and President Barack Obama is expected in a speech Thursday to emphasize more action to prevent the world's largest economy from falling back into recession.

Lacker said he opposed the Fed's extension of its ultra-low rates pledge. He declined to comment on which possible extra measure -- such as more asset purchases or switching the Fed's balance sheet to longer-term assets -- he considered to be the worst.

Fed officials disagree on whether the high jobless rate is due to economic slack or a lack of qualified workers to fill vacancies, as well as whether inflation that is currently not far below the central bank's targets will recede.

"I think we're capable of seeing inflation remain around 2 (percent) even with an overhang of unemployed," Lacker said.

"I think it's a little risky to depend on slow growth and high unemployment to bring inflation down," he said.

Lacker pointed to recent research from the Richmond Fed arguing that, in the short term, problems matching workers to jobs may mean the economy's ability to grow without inflation is much lower. He said the natural rate of unemployment for the United States in the first quarter of 2011 may be as high as 7.9 per cent.

Lacker said he understood but disagreed with the arguments that led Charles Evans, president of the Chicago Fed, to call for extra stimulus and suggest that a temporarily higher inflation rate of 3 per cent would not be a catastrophe.

"That case depends critically on the credibility of the central bank, on the credibility of their commitment to raise inflation and then lower it later," said Mr Lacker. "I don't view our credibility as complete and solidly enough grounded to be able to pull that off. I think it would be very risky for us to try to temporarily raise inflation rates."

(Reporting by Mark Felsenthal; editing by Jeffrey Benkoe)