By Alister Bull
COLUMBIA, S.C., Jan 13 (Reuters) - A top Federal Reserve policy-maker on Tuesday sharply criticized action taken by his colleagues at the U.S. central bank and warned that emergency steps to stem a credit crisis may end up making matters worse.
Richmond Federal Reserve President Jeffrey Lacker, one of the most hawkish members of the Fed and a voting member of its interest rate-setting committee this year, also repeated that inflation risks must not be ignored.
'Mixing monetary and fiscal policy is fraught with risks,' Lacker told a meeting of South Carolina business leaders, repeating a speech he gave on Friday.
The Fed has slashed interest rates almost to zero and pumped hundreds of billions of dollars into credit markets to end a year-long recession. Lacker, concerned the central bank has gone too far, warned of the longer-term consequences.
'No matter how one assesses the overall merits of such programs, it is important to recognize that these are fiscal measures that are distinct from monetary policy,' he said.
'While at the present time, credit programs do not conflict with our monetary policy strategy, there could well come a time at which monetary stimulus needs to be withdrawn to prevent a resurgence of inflation, even though credit markets are not deemed fully healed,' he said.
The Fed has lent money directly to certain parts of the credit markets to keep them from freezing up entirely in panic over losses after the collapse of the U.S. housing market.
Lacker said these efforts to make up for a perceived lack of bank capital may be missing the real problem.
'My reading of current conditions is that bank lending is constrained more now by the supply of creditworthy borrowers than by the supply of bank capital,' he said.
'This may explain why recent programs aimed at reducing credit spreads, in particular financial sectors, seem to have had such limited effects,' he said.
The Fed on Dec. 16 lowered its benchmark overnight funds rate target to zero-0.25 percent and it said in an accompanying statement that it could hold these low rates for 'some time.'
Minutes of the Fed's Dec. 15-16 meeting released later showed some that policy-makers worried the United States could suffer from a Japan-style deflation, where a general prolonged decrease in prices contributed to a decade of stagnation in the 1990s.
Lacker said deflation was dangerous but dismissed it as a significant prospect in the United States at the moment.
'I do not believe that deflation is a major risk right now,' he said, adding that it would be easier to combat if the Fed adopted a specific objective for inflation by targeting a pre-announced level.
(Editing by Leslie Adler) Keywords: USA FED/LACKER (alister.bull@thomsnreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
COLUMBIA, S.C., Jan 13 (Reuters) - A top Federal Reserve policy-maker on Tuesday sharply criticized action taken by his colleagues at the U.S. central bank and warned that emergency steps to stem a credit crisis may end up making matters worse.
Richmond Federal Reserve President Jeffrey Lacker, one of the most hawkish members of the Fed and a voting member of its interest rate-setting committee this year, also repeated that inflation risks must not be ignored.
'Mixing monetary and fiscal policy is fraught with risks,' Lacker told a meeting of South Carolina business leaders, repeating a speech he gave on Friday.
The Fed has slashed interest rates almost to zero and pumped hundreds of billions of dollars into credit markets to end a year-long recession. Lacker, concerned the central bank has gone too far, warned of the longer-term consequences.
'No matter how one assesses the overall merits of such programs, it is important to recognize that these are fiscal measures that are distinct from monetary policy,' he said.
'While at the present time, credit programs do not conflict with our monetary policy strategy, there could well come a time at which monetary stimulus needs to be withdrawn to prevent a resurgence of inflation, even though credit markets are not deemed fully healed,' he said.
The Fed has lent money directly to certain parts of the credit markets to keep them from freezing up entirely in panic over losses after the collapse of the U.S. housing market.
Lacker said these efforts to make up for a perceived lack of bank capital may be missing the real problem.
'My reading of current conditions is that bank lending is constrained more now by the supply of creditworthy borrowers than by the supply of bank capital,' he said.
'This may explain why recent programs aimed at reducing credit spreads, in particular financial sectors, seem to have had such limited effects,' he said.
The Fed on Dec. 16 lowered its benchmark overnight funds rate target to zero-0.25 percent and it said in an accompanying statement that it could hold these low rates for 'some time.'
Minutes of the Fed's Dec. 15-16 meeting released later showed some that policy-makers worried the United States could suffer from a Japan-style deflation, where a general prolonged decrease in prices contributed to a decade of stagnation in the 1990s.
Lacker said deflation was dangerous but dismissed it as a significant prospect in the United States at the moment.
'I do not believe that deflation is a major risk right now,' he said, adding that it would be easier to combat if the Fed adopted a specific objective for inflation by targeting a pre-announced level.
(Editing by Leslie Adler) Keywords: USA FED/LACKER (alister.bull@thomsnreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.