Fed's Lacker says big balance sheet doesn't tie Fed's hands

BALTIMORE Fri Jan 3, 2014 2:26pm EST

BALTIMORE (Reuters) - The unprecedented size of the Federal Reserve's balance sheet will not keep the Fed from being able to conduct effective monetary policy, a top U.S. central banker said on Friday.

Asked after a speech here if the Fed's now nearly $4-trillion balance sheet would tie the Fed's hands, Jeffrey Lacker, president of the Richmond Federal Reserve, said, "I think it doesn't."

Lacker explained that the Fed has the ability to control short-term interest rates, in part because it pays interest on the excess reserves banks hold at the Fed.

Lacker is a strong opponent of the Fed's recent bond-buying programs, and he supported the Fed's move last month to start winding down its most recent round of asset purchases.

Lacker also said he expects the U.S. dollar to remain the world's reserve currency for years to come.

"It strikes me as unlikely that we're going to see in the next decade or more any significant unseating of the dollar as a reserve currency," he said.

(Reporting by Luciana Lopez; Writing by Ann Saphir; Editing by Leslie Adler)

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