FOMC Dissenter Explains Vote

Richmond Fed President Jeffrey Lacker issued a statement this morning defending his lone vote against the Fed’s extension of Operation Twist. Lacker said that more monetary stimulus would not make a “substantial difference” in US economic growth and employment “without increasing inflation by more than would be desirable.”

Lacker doesn’t think that the “impediments to growth” can be solved with monetary policy. He worries that increased inflation “could threaten the Fed’s credibility”, making it more difficult for the FOMC to “achieve the Committee’s long-run goals, including maximum employment.”

Core personal consumption expenditures (PCE) inflation is currently running below the Fed’s target of “around 2%” and PCE inflation is even lower. The Fed’s own estimates on inflation going forward are lower still.

Unemployment estimates, however, are rising, from a 2012 range of 7.8%-8.0% to 8.0%-8.2%. For 2013, the Fed estimate rose from 7.3%-7.7% to 7.5%-8.0%.

Exactly what Lacker thinks is going to happen on the inflation and employment fronts that is different from the FOMC’s estimates remains unclear. The Fed’s decision to continue Operation Twist is timid enough as a weapon to combat unemployment. Even further easing might not accomplish much to improve employment. But worrying about virtually non-existent inflation that is projected to fall even further is really a position that is hard to defend. Lacker tried though.

Lacker’s statement is here.

Paul Ausick