Fed Inflation, Employment Thresholds Worry Two Fed Presidents

US Federal Reserve
US Federal Reserve

The lone negative vote on the Fed's recent adoption of inflation and employment thresholds was cast by Richmond Federal Reserve President Jeffrey Lacker, which is not terribly surprising given his long-standing opposition to expansion of the Fed's balance sheet. It is also not a big surprise that Dallas Federal Reserve President Richard Fisher, who does not have a vote on the Federal Open Market Committee (FOMC), is also worried about future inflation.

In a press release issued this morning, Lacker discusses his no vote on the change in Fed policy. Lacker repeated his objection to purchases of agency mortgage-backed securities, saying, "Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role" for the Fed.

Lacker also objected to replacing the Fed's "date-based forward guidance with guidance base on numerical thresholds," arguably the most significant part of the Fed's Wednesday announcement. Lacker does think it's appropriate for the Fed to provide guidance, but:

[M]onetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC's price stability and maximum employment mandates. I would prefer to describe in qualitative terms the economic conditions under which our monetary policy stance is likely to change.

Fisher, in an interview with CNBC, said he is concerned that markets will become "overly concerned" with the new thresholds, especially the 2.5% inflation threshold. Fisher also said that the accommodative Fed policies encourage Congress "not to get the job done" regarding federal deficits and the approaching fiscal cliff.

The text of Lacker's comments is available here.

Paul Ausick

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