Fed's latest steps risk its credibility: Lacker

Mon Dec 17, 2012 11:34am EST

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

(Reuters) - A top Federal Reserve policymaker on Monday redoubled his opposition to the central bank's accommodative policies, warning that its latest policy steps "test the limits" of the Fed's hard-won credibility on inflation.

Repeating arguments he has made in the past, Richmond Fed President Jeffrey Lacker said the central bank's growing stable of assets makes it much more vulnerable to "small errors."

The Fed is "straining to provide as much stimulus as possible without endangering our price-stability credibility," he said on CNBC television. "My worry and the reason I dissented ... is that we seem to be willing to test the limits of that credibility."

The Fed last week stepped up its bond-buying plan, meant to spur investment and economic growth. For the first time, it also pledged to keep interest rates near zero while unemployment remained above 6.5 percent, provided inflation remains contained below 2.5 percent. This replaced a previous commitment to hold rates down until at least mid-2015.

Lacker, who has dissented on every Fed policy decision this year, said he backed dumping the calendar-based policy. But he argued the 6.5 percent threshold is "risky" because the unemployment rate is not a fulsome measure of the labor market, and because the Fed cannot directly control the jobless rate.

"The risk is that people become fixated on it, and it becomes an interference in our communications," he said, adding it could create tension with the Fed's mandate to keep prices stable.

Lacker added he expects the United States to reach 6.5 percent unemployment in about three years. The jobless rate was 7.7 percent last month, down from previous levels but still high.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama, Nick Zieminski)

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