Federal Reserve buying of longer-dated Treasury securities ought to lower interest rates, but this potentially inflationary stimulus may prove tough to unwind, a top Fed policy-maker said on Thursday.
If we intervene and bring down the Treasury rate, the risk-free rates, we bring down all rates in tandem. That is why I favored intervening in U.S. Treasuries, Federal Reserve Bank of Richmond President Jeffrey Lacker told students at the College of Charleston.
Lacker is a voting member of the Fed's policy-setting committee this year. The Fed voted unanimously at a meeting last week to buy up to $300 billion of longer-dated Treasuries and an additional $850 billion of agency mortgage debt in order to stimulate credit and confront a deepening U.S. recession.
Lacker, who is among the most outspoken anti-inflation hawks among Fed policy-makers, also said it would be a tough task to prevent inflation in the future from this action, and would require leadership from the U.S. central bank.
Whether it has an inflationary impact or not depends on our skill at the Federal Reserve in withdrawing the stimulus in a timely way when the economy begins to recover. That is a very delicate, very hard policy.
The economy when it recovers is spotty...Inevitably, we face this dilemma. Do we keep policy easy and stimulative because of the sectors that are lagging behind in this recovery or do we get ahead of the curve...it is going to be a tough call, he said.
Lacker will deliver a luncheon speech to the Charleston Metro Chamber of Commerce at 12:40 p.m.