Richmond Federal Reserve President Jeffrey Lacker said on Thursday that the U.S. central bank still retains a "unique" ability to influence inflation, but that monetary policy's impact on real economic activity is limited.
"Monetary policy is uniquely capable of affecting the price level over the longer term," Lacker said. "By contrast, real activity is driven predominantly by factors beyond the control of monetary policy – productivity and population growth, for example."
The Federal Reserve has been perturbed by inflation that continues to run below its 2 % target rate, and some Fed officials have advocated waiting for more signs that inflation will rise before embarking on a path of monetary tightening.
Lacker, who has twice voted this year to raise rates when the rest of his Fed policymaker colleagues decided to stay put, said the recent behavior of inflation "does not warrant such pessimism" but added that the credibility of such an inflation goal "depends on the public's belief that the central bank has and will use the tools necessary to make inflation return to its goal, should that become necessary."
To that end the Fed should look more deeply at the mechanism through which its actions affect money creation and ultimately the price level, he said, "taking into account how the monetary policy toolkit has changed since the financial crisis."
Lacker, who was speaking before a think tank identified with libertarian and free-market ideas, will rotate out of being a voting member of the Fed's rate-setting committee at the end of the year.