September 26, 2013 / 6:56 AM / 6 years ago

Fed's Lacker says hard to start tapering in Oct without losing face

WASHINGTON/STOCKHOLM (Reuters) - The Federal Reserve will find it hard to rein in monetary policy next month without losing face after it surprised markets by holding fire last week, a top Fed official said on Thursday.

Federal Reserve Bank of Richmond President Jeffrey Lacker testifies before the House Financial Services Committee hearing on "Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts" on Capitol Hill in Washington June 26, 2013. REUTERS/Yuri Gripas

Jeffrey Lacker, president of the Richmond Fed, told reporters at a banking seminar in Stockholm he saw no reason not start tapering in October but said it could be difficult after the Fed’s surprise decision last week not to reduce its monthly asset purchases.

“It could be hard to do it (tapering) in October without losing face, but I don’t see why we couldn’t do it,” he said.

Lacker, one of the central bank’s most hawkish officials who is not a voter this year, also said he thought the decision had hurt the central bank’s credibility.

“I think given what we did, it’s going to be harder for us to communicate credibly in the future”, he said.

Lacker did not want to speculate on how quick the FOMC would wind down their assets purchases but said he personally thinks it could be done relatively fast.

“I think we could go a quarter of the way each time, maybe even a third of the way”, he said.

The FOMC, the Fed’s policy-setting body, last week voted to continue to buy bonds at a monthly pace of $85 billion.

Earlier in a speech he also said the Fed’s effort to assure the public that interest rates will remain near zero for years could have the perverse effect of hurting confidence and damaging economic growth.

Lacker has been critical of the Fed’s asset purchases, particularly of mortgages, which he says constitute fiscal policy and open the central bank up to greater political meddling.

But on Thursday, Lacker also took aim at a tool top policymakers have touted as having increasing importance in the Fed’s arsenal, and which is also being employed in Europe and Britain - rates guidance.

“Forward guidance could have the paradoxical effect of reducing current economic activity, by reducing expectations about the level of future economic activity,” Lacker said at the Swedbank economic outlook seminar, in prepared remarks received in Washington.

The other danger is that the combination of an enlarged balance sheet, now at $3.7 trillion, and the promise of low rates for a prolonged period could make it more difficult for the Fed to pull back gracefully, he said.

“Our current unconventional policies may make it more likely that we act too slowly when it’s time to raise rates, and may make such a delay more costly,” argued Lacker.

He also echoed market concerns about Fed communications following the decision not to start the Fed’s bond purchases.

“Credibility requires consistency, over time, between a central bank’s statements and its actual subsequent actions,” he said. “Widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements.”

Editing by Peter Cooney and Toby Chopra

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