Jeffrey Lacker, who is President of the Federal Reserve Bank of Richmond, is speaking this Friday at the Frank Batten School of Leadership and Public Policy at the University of Virginia. While his speech is targeted toward this school today, Lacker does go on to show a dissenting view about QE3 and the guidance of the FOMC.
Lacker said, “I have agreed with the Committee’s decision to keep interest rates near zero, since our economy is growing at only a relatively modest pace. In such an environment, low interest rates and the corresponding monetary stimulus are needed to keep inflation from falling below the Committee’s 2 percent objective.”
Lacker also said that he has dissented at all six FOMC meetings this year that language in the guidance is highly imperfect as a way to communicate about future policy as it could be misinterpreted as wavering from the 2% inflation target. Lacker again said that he thinks that mortgage-backed securities purchases will bring only small economic benefits without also causing an unwelcome increase in inflation. He thinks that adding to the Fed’s balance sheet increases the risks that the FOMC will be forced down the road to move quickly when the time comes to normalize monetary policy and begin raising rates.
Treasury purchases would have been more effective according to Lacker. Buying mortgage-backed securities may reduce borrowing rates for conforming home mortgages but the consequence is that it will raise interest rates for other borrowers and distort credit flows. Lacker’s view being conveyed today is that the U.S. economy is on a relatively sluggish path of recovery, where after losing more than 8 million jobs about 4 1/4 million net new jobs have been created. He referred to the decline in the unemployment rate as “disappointingly slow.”
JON C. OGG
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