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2012

 
Jeffrey M. Lacker

December 14, 2012

Richmond Fed President Lacker Comments on FOMC Dissent

Richmond, Va.

The Federal Open Market Committee (FOMC) decided on December 12, 2012, to ‘continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.’ The Committee also stated it will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at year-end, initially at a pace of $45 billion per month. I disagreed with the Committee’s decision to continue purchasing additional assets to stimulate the economy. With economic activity growing at a modest pace and inflation fluctuating close to 2 percent — the Committee’s inflation goal — further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations.

“I also objected to the continuing purchase of agency mortgage-backed securities. If asset purchases are appropriate, the FOMC should confine its purchases to U.S. Treasury securities. Purchasing agency mortgage-backed securities can be expected to reduce borrowing rates for conforming home mortgages by more than it reduces borrowing rates for nonconforming mortgages or for other borrowing sectors, such as small business, autos or unsecured consumer loans. Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, ‘Government decisions to influence the allocation of credit are the province of the fiscal authorities.’

“The Committee also altered its description of its expectations regarding future interest rate changes, replacing its previous date-based forward guidance with guidance based on numerical thresholds. Specifically, the Committee said it anticipates the current ‘exceptionally low’ target range for the federal funds is likely to remain appropriate ‘at least as long as the unemployment rate remains above 6.5 percent, the inflation rate over the next one to two years is projected to be no more than half a percentage point above its 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.’ I have dissented previously against the use of date-based forward guidance, and I supported the decision to drop such language at the December meeting.

“I agree that it’s useful for the Committee to describe how its future actions are likely to depend on the evolving state of the economy. However, monetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates. I would prefer to describe in qualitative terms the economic conditions under which our monetary policy stance is likely to change.

“My views on the economy and monetary policy are also available on richmondfed.org.”


The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.

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