By Alister Bull
RICHMOND, Va., Jan 31 (Reuters) - Richmond Federal Reserve President Jeffrey Lacker said on Saturday that the Fed's support of specific credit markets to end a U.S. recession was not the best strategy and could cost its policy independence.
Lacker dissented last week from his colleagues on the Federal Open Market Committee, who voted to expand the Fed's support of the mortgage-backed securities and consumer loan markets as they decided to keep interest rates close to zero.
'My dissent was about the composition of our portfolio, it was about the kind of assets we hold. I am fine with the size of the monetary base about where it is right now,' he told reporters on the sidelines of an economics conference hosted by the University of Richmond.
'I think we need that monetary stimulus with the severe recession we are in. But if we are going to expand our balance sheet to that extent, I think we should try and do it in a way that is neutral in its effects across different credit markets,' Lacker said.
The Fed has pumped hundreds of billions of dollars into the credit markets to make loans more affordable in an effort to help restore spending and end the economy's year-long recession following the collapse of the housing market.
But these actions have more than doubled the size of the U.S. central bank's balance sheet to almost $2 trillion.
Some economists say the Fed has veered into industrial policy by favoring certain credit markets over others, and warn this could open the U.S. central bank to unwanted interference from Congress that could curb its independence.
Policy-makers said after their meeting on Wednesday they might also purchase long-term U.S. Treasury securities if they decided this would help private credit market conditions.
Lacker said this would be a better choice than intruding into credit markets because it spares the Fed making decisions that creates winners and losers in the private sector.
'If you compare buying Treasuries to a target credit program, the targeted credit program will result in lower interest rates in the targeted credit sector, but higher interest rates in other sectors,' he said. 'I'm not sure we want to raise some people's interest rates in order to lower other people's interest rates.'
In addition, the Fed may find it very hard to exit these credit policies in the future, which could hamper its ability to fight inflation once the economy recovers.
'There is obviously the potential for conflict between the objectives of a targeted credit program and what we might want to do with the monetary base in an economic recovery,' he said.
'I don't think you'd want people to be afraid that we would terminate a program just to be able to reduce the base, and you would not want people to be afraid that we would risk an acceleration of inflation in order to preserve a credit program,' Lacker said.
Panic caused by massive bank losses following the collapse of the country's housing market froze credit and tipped the economy into recession in December 2007.
Data on Friday showed that growth shrank by 3.8 percent on an annualized basis, and the sharp decline in consumer spending pointed to an even weaker first quarter.
But Lacker said that recent economic indicators had not changed his outlook for a recovery before the end of the year.
'I still expect some positive momentum by the end of the year,' he said.
(Reporting by Alister Bull, editing by Gary Crosse)
((+1-202-354-5820, e-mail: alister.bull@reuters.com)) Keywords: FED LACKER/ (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.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.
RICHMOND, Va., Jan 31 (Reuters) - Richmond Federal Reserve President Jeffrey Lacker said on Saturday that the Fed's support of specific credit markets to end a U.S. recession was not the best strategy and could cost its policy independence.
Lacker dissented last week from his colleagues on the Federal Open Market Committee, who voted to expand the Fed's support of the mortgage-backed securities and consumer loan markets as they decided to keep interest rates close to zero.
'My dissent was about the composition of our portfolio, it was about the kind of assets we hold. I am fine with the size of the monetary base about where it is right now,' he told reporters on the sidelines of an economics conference hosted by the University of Richmond.
'I think we need that monetary stimulus with the severe recession we are in. But if we are going to expand our balance sheet to that extent, I think we should try and do it in a way that is neutral in its effects across different credit markets,' Lacker said.
The Fed has pumped hundreds of billions of dollars into the credit markets to make loans more affordable in an effort to help restore spending and end the economy's year-long recession following the collapse of the housing market.
But these actions have more than doubled the size of the U.S. central bank's balance sheet to almost $2 trillion.
Some economists say the Fed has veered into industrial policy by favoring certain credit markets over others, and warn this could open the U.S. central bank to unwanted interference from Congress that could curb its independence.
Policy-makers said after their meeting on Wednesday they might also purchase long-term U.S. Treasury securities if they decided this would help private credit market conditions.
Lacker said this would be a better choice than intruding into credit markets because it spares the Fed making decisions that creates winners and losers in the private sector.
'If you compare buying Treasuries to a target credit program, the targeted credit program will result in lower interest rates in the targeted credit sector, but higher interest rates in other sectors,' he said. 'I'm not sure we want to raise some people's interest rates in order to lower other people's interest rates.'
In addition, the Fed may find it very hard to exit these credit policies in the future, which could hamper its ability to fight inflation once the economy recovers.
'There is obviously the potential for conflict between the objectives of a targeted credit program and what we might want to do with the monetary base in an economic recovery,' he said.
'I don't think you'd want people to be afraid that we would terminate a program just to be able to reduce the base, and you would not want people to be afraid that we would risk an acceleration of inflation in order to preserve a credit program,' Lacker said.
Panic caused by massive bank losses following the collapse of the country's housing market froze credit and tipped the economy into recession in December 2007.
Data on Friday showed that growth shrank by 3.8 percent on an annualized basis, and the sharp decline in consumer spending pointed to an even weaker first quarter.
But Lacker said that recent economic indicators had not changed his outlook for a recovery before the end of the year.
'I still expect some positive momentum by the end of the year,' he said.
(Reporting by Alister Bull, editing by Gary Crosse)
((+1-202-354-5820, e-mail: alister.bull@reuters.com)) Keywords: FED LACKER/ (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.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.