* Thresholds would suggest when Fed will raise rates
* But plan ignores broader economic information, Lacker says
* Legislation may be needed to limit Fed lending, he says
By Jonathan Spicer
NEW YORK, Nov 20 A top 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 also floated the idea
that legislation might be necessary to limit the Fed's emergency
lending activities, if the central bank cannot limit itself.
But Lacker spent much of his speech pouring 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 placing great weight on
the jobless rate alone "can easily lead you astray," given the
complexity of factors that influence the labor market.
Adopting an inflation threshold, in particular, "essentially
requires that we lose a measure of credibility before it can be
invoked," he said. This is because even if the unemployment rate
remains stubbornly high, a rise in inflation would be necessary
to finally reverse monetary policy, he added.
The idea of thresholds has been increasingly debated at the
last few policy meetings of the central bank. A few of the Fed's
19 policymakers have even pitched their own specific proposals,
including Chicago Fed President Charlie Evans, credited with
hatching the plan.
Evans, for example, wants ultra-low rates as long as the
jobless rate remains above 7 percent - unless inflation rises to
3 percent. U.S. unemployment was 7.9 percent last month, while
inflation has remained slightly below the Fed's 2-percent
Fed Chairman Ben Bernanke may weigh in on the debate in a
speech later on Tuesday in New York.
The thresholds would likely replace the Fed's use of a
calendar date - currently mid-2015 - to signal how long it
expects to keep rates near zero, where they have been since late
2008 to help the U.S. economy recover from the recession.
Lacker said the calendar date can confuse investors who
misinterpret it as Fed pessimism on the state of the economy. He
argued the Fed could "provide some sense of the economic
conditions under which it's likely to begin raising rates and
reducing the size of its balance sheet."
"But it's important to avoid spurious precision," he said.
The central bank has also bought more than $2.3 trillion in
assets to boost the recovery and get Americans back to work.
Turning to lending, Lacker criticized what he called
"expansive central bank lending," and warned that "establishing
credible limits" could be difficult. The policymaker has in the
past made the case against "discretion" in emergency Fed
"One could imagine legislation that limits the Fed to a
narrowly defined set of ordinary lending activities - very
short-term lending to sound, solvent banks, against good
collateral, at rates above interbank market rates," he said.
"If the Federal Reserve cannot limit credit policy of its
own accord, legislation may be the best option."