BALTIMORE (Reuters) - A top Federal Reserve official on Thursday warned that the U.S. central bank should not be too slow to react to tighten financial conditions in a solidly recovering economy.
Businesses have so far absorbed price increases from energy products and commodities, suggesting they believe the Fed will keep inflation in check, Richmond Federal Reserve President Jeffrey Lacker said in remarks prepared for delivery at the University of Baltimore.
“The responsibility of the (Fed’s policy-setting) Federal Open Market Committee is to validate these expectations by conducting monetary policy in such a way that inflation does not accelerate,” he said.
Lacker, not a voter on the FOMC this year, is seen as one of the strongest anti-inflation hawks on the panel.
The Fed is not expected to deviate from its course of buying $600 billion in longer-term Treasuries through the middle of June to support a steady if unspectacular recovery from the deepest recession in decades. Chairman Ben Bernanke, the key shaper of policy, has given no sign that even after the bond buying is complete, the Fed would be in a hurry to reverse course.
Nevertheless, Lacker’s comments, which echo those of other hawks on the Fed, indicate there will be an intense debate at the central bank’s April 26-27 meeting over when and how to move to the exits.
The Fed cut rates to near zero in December 2008 and then bought $1.7 trillion in longer-term securities to drag the economy out of its downturn. When the recovery appeared to falter last year, it launched another round of bond buying in November to buoy growth.
Lacker said the Fed erred in 2004-2007 in holding interest rates low for too long, letting inflation remain relatively elevated for a period of several years.
“I do not consider it a success. I hope we do better this time,” he said.