Fed's Lacker: QE3 unlikely to boost jobs, could stir inflation

CHARLOTTE Mon Dec 17, 2012 1:00pm EST

CHARLOTTE Dec 17 (Reuters) - The U.S. Federal Reserve's latest steps to goose an anemic recovery are unlikely to do much to bring down unemployment and carry a "material" risk of sparking inflation, one of the U.S. central bank's most hawkish policymakers said on Monday.

Last week the Fed said it would buy $45 billion in longer-term Treasuries each month, on top of its monthly purchases of $40 billion in mortgage-backed securities, until it sees a substantial improvement in the outlook for the U.S. labor market.

Although inflation has averaged near the Fed's 2 percent goal over the last 20 years, and should stay a little below that next year, Richmond Fed President Jeffrey Lacker said he worried the latest Fed actions could endanger that record.

"I see material upside risks to inflation in 2014 and beyond, given the current trajectory for monetary policy," Lacker said in remarks prepared for delivery to the Charlotte Chamber of Commerce Annual Economic Outlook Conference. "The effects on longer-term interest rates are uncertain and likely quite small, and the potential to boost job creation seems quite limited, given the fundamental impediments that appear to be restraining growth now."

The U.S. economy will likely grow about 2 percent next year and will "begin to firm" the following year, Lacker said. A sudden rise in energy prices or an unexpected downturn in a major U.S. trading partner could knock that pace down, he said.

On the other hand, if U.S. lawmakers make convincing progress toward fiscal sustainability, a stronger-than expected resurgence is "not inconceivable," he added, as relief releases a "rush of pent-up spending."

In any event, Lacker said, monetary policy alone can do little to improve economic growth or bring down unemployment, currently at 7.7 percent.

"Our primary responsibility at the Federal Reserve is to keep inflation low and stable," he said. "We do not really know whether monetary policy can make a sustainable difference in labor market outcomes, and we may be attempting to achieve more rapid improvement than is feasible," he said.

Last week, in a bid to reassure markets it will leave easy monetary policy in place until the recovery is much farther along, the Fed vowed to keep interest rates low until unemployment falls to at least 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.

It was the first time the Fed had picked a specific marker for unemployment to guide policy.

Lacker, who dissented at every Fed policy meeting this year, repeated his opposition to that move, saying that setting a threshold for unemployment is "inconsistent" with a balanced approached to the Fed's duties.

"We need to be careful that in our zeal to promise future stimulus, we do not constrain ourselves in ways that endanger the price stability on which we've come to depend," he said.

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