PALO ALTO, Calif. May 30 A top Federal Reserve
official warned that intervention in credit markets could
undermine central bank independence, and called for the
imposition of "credible limits" on such activism.
"Entanglement in the distributional politics of credit
allocation inevitably threatens the delicate equilibrium
underlying central bank independence, which has been so
essential to monetary stability," Richmond Fed President Jeffrey
Lacker said in remarks prepared for delivery to Stanford
University's Hoover Institution.
To drive home his point, Lacker pointed to the 1970s, when
the Fed not only allowed inflation to get out of hand as it
focused on bringing down unemployment, but also failed to resist
pressure to buy federal agency debt.
As a result, he said, by 1977 the Fed owned $117 million in
debt issued by Washington DC's transportation authority, "with
the bizarre result that the Fed wound up financing the
construction of the Washington Metro."
Lacker has long criticized the Fed for engaging in credit
allocation, including some of its actions during the financial
crisis to rescue failing financial institutions.
To Lacker, the Fed had set up expectations long before the
crisis that it would bail out distressed institutions when
needed, and that it needs to end those expectations before
financial stability can be restored.
"Establishing credible limits to central bank intervention
in credit markets is critical to central banks' core monetary
policy mission," he said.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)