* Fed is testing limits of credibility with latest
* Unemployment threshold could tie Fed's hands on inflation,
* Stein: Fed rules on foreign banks should make them more
By Rick Rothacker
CHARLOTTE, Dec 17 The U.S. Federal Reserve's
latest policy actions 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
"I see material upside risks to inflation in 2014 and
beyond, given the current trajectory for monetary policy,"
Richmond Fed President Jeffrey Lacker told the Charlotte Chamber
of Commerce Annual Economic Outlook Conference.
Lacker, who dissented at every Fed policy-setting meeting
this year, also warned the central bank's growing stable of
assets makes it much more vulnerable to "small errors."
The Fed is "straining to provide as much stimulus as
possible without endangering our price-stability credibility,"
he said on CNBC television. "My worry and the reason I dissented
... is that we seem to be willing to test the limits of that
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
And for the first time, 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.
This replaced a previous commitment to hold
rates down until at least mid-2015.
Lacker said he backed dumping the calendar-based policy. But
he argued the 6.5 percent threshold is "risky" because the
unemployment rate is not a complete measure of the labor market,
and because the Fed cannot directly control the jobless rate.
"The risk is that people become fixated on it, and it
becomes an interference in our communications," he told CNBC,
adding it could create tension with the Fed's mandate to keep
It could also tie the Fed's hands, "preventing a preemptive
move against inflation," Lacker told reporters later in the day.
"I should be clear I don't see inflation risks in the year
ahead," he said. "And maybe they won't be large in 2014, but
it's at that time where growth picks up where people are going
to start questioning, 'Are they going to move pre-emptively or
not?' that makes me worry about the implications of this."
Lacker added he expects the United States to reach 6.5
percent unemployment in about three years. The jobless rate was
7.7 percent last month, down from previous levels not because of
fast job growth but because more discouraged workers are leaving
the labor force.
Lacker forecast the U.S. economy to grow about 2 percent
next year and to "begin to firm" the following year. 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, noting that inflation
has averaged near the Fed's 2 percent goal over the last 20
"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,"
Federal Reserve Board Governor Jeremy Stein, speaking
separately in Frankfurt, did not comment on the U.S. economic
outlook or monetary policy in his prepared remarks, but instead
focused on what he said would be the benefits of proposed rules
from the Fed last week to tighten oversight of foreign banks.
The plan would force foreign banks to group all their
subsidiaries under a holding company, subject to the same
capital standards as U.S. holding companies. The biggest banks
will also need to hold liquidity buffers.
"These rules should reduce the pressure on foreign banks
that rely heavily on short-term dollar funding to either sell
illiquid dollar assets or cut back on dollar lending in times of
financial stress," Stein said.