Fed’s Lacker Says Current Fed Policy Raised Likelihood of Mistakes

Richmond Federal Reserve Bank President Jeffrey Lacker said Thursday that the combination of the continued use of unconventional measures, a very large balance sheet and forward guidance have increased chances for mistakes when the time comes to begin withdrawing monetary stimulus.

 

Highlights from his speech at the Swedbank Economic Outlook Seminar in Stockholm:

 

The Federal Reserve has pursued a number of unconventional policies since the financial crisis of 2007–2008.
 
It lowered the short-term interest rate to near zero in 2008, where it remains today. In addition, it has attempted to influence longer-term interest rates through two channels: “forward guidance” announcements stating that monetary policy will remain accommodative until labor market conditions improve and large-scale long-term asset purchases, including mortgage-backed securities, or MBS.
 
The Fed will face risks as it pursues its “exit strategy” from recent unconventional policies. The combination of a very large balance sheet and forward guidance raises the potential of a timing error when it becomes appropriate to raise rates, as well as the consequences of such an error. In addition, by purchasing MBS, the Fed has targeted a specific private sector asset and engaged in credit policy. Such actions could invite pleading from other sectors and entangle the Fed in distributional politics and threaten its independence.

 

Note that all Fed members’ speeches ncerning QE and economic activity since the last FOMC meeting (September 17-18) are available here.