Fed's Lacker warns on US monetary policy 'thresholds' plan

NEW YORK Tue Nov 20, 2012 9:00am EST

NEW YORK Nov 20 (Reuters) - A top U.S. Federal Reserve official on Tuesday challenged an idea that is gaining traction at the U.S. central bank, arguing that adopting so-called thresholds to guide policy would be a risky move that fails to take into account broader economic conditions.

Richmond Fed President Jeffrey Lacker used a speech in part to pour cold water on an idea publicly endorsed by a few Fed policymakers, including influential Vice Chair Janet Yellen: setting specific rates for unemployment and inflation as markers for when the Fed would consider lifting interest rates.

"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 at a meeting of the Shadow Open Market Committee, a private organization that analyzes monetary policy.

Lacker, an inflation hawk who has dissented at every Fed policy-setting meeting this year, said "one or two" thresholds do not always capture the "rich array" of economic information the Fed need to consider in setting monetary policy.

Adopting an inflation threshold, in particular, "essentially requires that we lose a measure of credibility before it can be invoked," he said.

The idea of thresholds has been increasingly debated at the last few policy meetings of the central bank. A few Fed policymakers have even pitched their own specific proposals, including Chicago Fed President Charlie Evans, credited with hatching the plan.

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