Lacker Speech

Here's a speech from yesterday by Jeff Lacker, President of the Richmond Fed. Lacker was the only dissenter at the last FOMC meeting.

The speech begins with a useful discussion of the Fed's dual mandate, in particular how we should think about "maximum employment" in the short run and the long run. Then he discusses the reasons for his dissent. Basically he doesn't like any of the components of the Fed's change in policy - the planned asset purchases, the change in forward guidance, and the type of assets to be purchased.

Lacker argues that more accommodation now is not warranted, for two reasons. First, employment growth may be sluggish and the unemployment rate high, but

... my assessment is that a reasonably strong case can be made that the natural rate of unemployment that corresponds to the Fed’s maximum employment mandate is now relatively elevated.

Second, the Fed is doing fine on the inflation front, particularly relative to where it was at the brink of previous policy interventions.

It’s worth noting that when previous asset purchase programs were adopted in 2009 and 2010, the inflation outlook was significantly different than today. Back then, deflation appeared to be a very real possibility, so further accommodation, whatever it did for unemployment, also helped keep inflation closer to the Committee’s goal of 2 percent.

Lacker thinks the change in forward guidance may raise doubts about the Fed's commitment to control inflation.

The Committee’s statement also altered the “forward guidance” regarding future monetary policy, stating for the first time that it expected a highly accommodative stance of monetary policy for “a considerable period after the economic recovery strengthens.” I disagreed with this statement because I believe a commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases implies too great a willingness to tolerate higher inflation and would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.

Finally, Lacker has problems with purchases by the Fed of mortage-backed securities (MBS).

Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. Central banks abuse their independence when they promote some borrowers at the expense of others.

This is an important concern. Even if MBS are close substitutes for Treasury debt, and the decision about whether the Fed purchases MBS or Treasuries matters little, there is a perception that the Fed intends to favor a particular sector of the economy with this type of intervention. If indeed the MBS are not close substitutes for Treasuries, then, as Lacker points out, the Fed's actions will serve to reallocate credit. For example, investment in capital equipment will suffer relative to residential construction.

Lacker should not be characterized as some kind of extreme hawk. His views, as reflected in this speech, are well-reasoned, and well within the mainstream of modern economic thought.