Federal Reserve Bank of Richmond President Jeffrey Lacker said he opposes a proposal to tie central bank stimulus to the U.S. unemployment rate because such a move may spur inflation.
“Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do not always capture the rich array of policy-relevant information about the state of the economy,” Lacker said today in remarks prepared for a speech in New York.
Lacker’s comments highlight the challenge to Fed officials as they try to find a consensus on new ways to provide a forecast for monetary policy. Measures such as inflation and the unemployment rate could augment or replace the Fed’s current commitment to keep the main interest rate near zero through at least mid-2015.
Policy makers “generally favored” an approach linking the duration of record-low interest rates to “economic variables,” according to minutes of their Oct. 23-24 meeting released last week. Four Fed policy makers have backed this plan, which was first proposed by Chicago Fed President Charles Evans last year.
“This approach would place great weight on a single indicator of labor market conditions, one that can easily lead you astray,” Lacker said at the Shadow Open Market Committee Symposium. The panel is a group of independent economists who meet to evaluate the Fed’s policy choices.
“This risk seems particularly germane now,” he said, given “the difficulty of disentangling the trend and cyclical components” of a decline in participation in the labor force.
The Richmond Fed chief said Congress may need to constrain Fed credit policy should the central bank not set such limits itself.
“If the Federal Reserve cannot limit credit policy of its own accord, legislation may be the best option,” he said. “And the restraint of credit policy would not be complete unless limits on reserve bank lending are complemented by limits on the Fed’s ability to buy private sector assets.”
Lacker was the only policy maker to cast a dissenting vote at the Federal Open Market Committee’s Oct. 23-24 meeting in which officials maintained $40 billion in monthly purchases of mortgage-backed securities and affirmed their zero-interest-rate forecast. He has dissented from every FOMC decision this year.
There is “ample room for skepticism about the effect of the Fed’s asset purchases,” Lacker said, adding the movement of Treasury yields around the time of policy announcements has been “ambiguous.”