Fed stimulus plan poses inflation threat, Lacker says

NEW YORK Tue Sep 18, 2012 7:16pm EDT

Richmond Federal Reserve Bank President Jeffrey Lacker speaks during the Charlotte Chamber's Economic Outlook Conference in Charlotte, North Carolina December 19, 2011. REUTERS/Chris Keane

Richmond Federal Reserve Bank President Jeffrey Lacker speaks during the Charlotte Chamber's Economic Outlook Conference in Charlotte, North Carolina December 19, 2011.

Credit: Reuters/Chris Keane

NEW YORK (Reuters) - The Federal Reserve's latest monetary stimulus plan threatens a spike in inflation that would hurt the U.S. central bank's credibility, Richmond Fed President Jeffrey Lacker said on Tuesday.

Lacker, who has dissented against every Fed decision this year, said he strongly opposed the move to buy $40 billion per month of mortgage-backed securities. He said it amounts to channeling credit to a specific sector in a way that is not appropriate for the monetary authorities.

"I dissented on the question of a new asset purchase program because, in such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations," Lacker said in remarks prepared for delivery at an event sponsored by the Money Marketeers of New York University.

Last week, the Fed said it would continue buying assets until it sees substantial improvement in the U.S. labor market, which is still reeling from the deepest recession in generations.

Another concern for Lacker, an inflation hawk, was policymakers' indication that the Fed will keep a heavy dose of stimulus in place even as the economic recovery picks up steam.

Lacker cited impediments to economic growth, including a moribund housing sector, which he suggested made it harder for monetary policy to gain traction. That limits the Fed's ability to put a dent in the nation's 8.1 percent jobless rate.

He also cautioned against using estimates of the sustainable long-run rate of joblessness as a benchmark for policy.

"Perceptions that the Committee was focused on reducing unemployment at the expense of maintaining price stability would undercut that confidence and destabilize inflation," Lacker said, referring to the Fed's policy-setting Federal Open Market Committee.

U.S. economic growth has remained anemic this year, with gross domestic product expanding at an annual rate of 1.7 percent in the second quarter. That is seen as too low to spur any kind of rebound in hiring. (Writing by Pedro Nicolaci da Costa; Editing by Leslie Adler)

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