Lacker says early Fed rescues made crisis worse

LANCASTER, Pennsylvania Tue Feb 12, 2013 7:32pm EST

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during the Charlotte Chamber's Economic Outlook Conference in Charlotte, North Carolina December 17, 2012. REUTERS/Chris Keane

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during the Charlotte Chamber's Economic Outlook Conference in Charlotte, North Carolina December 17, 2012.

Credit: Reuters/Chris Keane

LANCASTER, Pennsylvania (Reuters) - A top Federal Reserve official known for his vocal disagreement on policy said on Thursday the central bank's early interventions in the financial crisis made things worse.

"At the time of the August 2007 discount rate cut, I questioned the presumption that the markets were suffering from a problem for which increased Fed credit was the solution," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in remarks prepared for delivery to students and academics at Franklin & Marshall College.

The recent release of transcripts of the Fed's meetings in 2007, when a historic financial crisis started to emerge, showed that Lacker had reservations about an August 2007 decision to offer extra support to bank lending.

"Each new move to expand institutions' reliance on Fed lending also had the effect of increasing expectations of official support in the months ahead," Lacker said on Tuesday.

He did not comment on the outlook for the U.S. economy or monetary policy.

Lacker argued that the Fed's interventions allowed troubled firms like Bear Stearns and Lehman Brothers to avoid taking more drastic measures to get their finances in order.

"I believe that a more measured response by the Fed in August 2007 could have resulted in significantly less instability in 2008," Lacker said.

As a voting member of the policy-setting Federal Open Market Committee last year, Lacker dissented at every single meeting. He has emphasized what he sees as inflationary risks from the Fed's greatly-expanded $2.9 trillion balance sheet.

(Reporting By Pedro Nicolaci da Costa; Editing by Leslie Adler)

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