[Zandra Ribas] Fed’s Lacker Warns More Bond Purchases Risk Inflation

Bloomberg Businessweek published an article last week regarding Federal Reserve President Jeffrey Lacker's opposition to the new Fed policy of tying continued central bank stimulus to the U.S. unemployment rate. Lacker is very much concerned, as many other economists and bankers, that the Fed policy of the last three years is going to create high inflation levels in the future. The Fed has stated its goal of keeping interest rates abnormally low to at least the middle of 2015.

At the recent Fed meeting on October 24, four Fed members approved this new criteria for their interest rate policy, which was first proposed by Chicago Fed President, Charles Evans. Lacker's opinion is that using one main economic indicator to set interest rate policy is wrong because it can distort the overall economic condition of the United States. Ben Bernanke, Fed Chairman, has advocated and set forth this same monetary stimulus for three years now; however, Lacker claims this policy has not produced the type of growth which was the goal. In addition, the Fed was hoping to ignite the housing market, which had been hit hard since 2007, but this has really not happened either for a variety of reasons, including tighter credit and lending standards and unemployment. Because certain structural and long term unemployment levels are beginning to set into the rate, this is also not a good indicator for interest rate policy.

Although the Fed is supposed to be an independent body from the executive and legislative branches, Lacker has proposed allowing Congress to intervene with the Fed to set some limits on how much money can be continued to be printed. Basically Lacker feels the Fed is losing control of the currency and needs restraints. If the U.S. economy should pick up in the next couple years, inflation could really become an issue here. Already prices of various commodities priced in dollars like gold, oil, and food have escalated tremendously in costs over the past few years because of Fed policy. The dollar has also taken a 20 percent decrease in value over the past couple years against other currencies.

Lacker is also strongly opposed to Fed mortgage security purchases because he feels the government needs to start not being so heavily involved with the housing industry, as Freddie Mac and Fannie Mae. These bureaus which supply mortgage monies are backed by tax payer dollars and both needing hundreds of billions of additional funds, while still not creating a healthy real estate market. Lacker is, in essence, opposed to the Fed purchasing its own debt because this will all end very poorly if it should continue.

Fed’s Lacker Warns More Bond Purchases Risk Inflation