The Federal Reserve's latest effort to push down long-term borrowing costs is likely to push inflation higher with little benefit to economic growth, a top central bank official said on Monday.
Jeffrey Lacker, the Richmond Fed's hawkish president, acknowledged inflation is likely to ebb in coming months as pressures from high energy and commodity prices ease. But he warned that inflation remained a threat.
Experience coming out of past recessions suggests that the risks to inflation lie to the upside, so I do not believe we should relax our vigilance on inflation at this time, Lacker told a group of business executives.
I doubt inflation will fall much below 2 percent for a sustained period, he said, referencing the central bank's implicit target for consumer prices.
Lacker said he opposed the Fed's latest push to push down long-term interest rates, known as Operation Twist, in which the central bank has committed to selling $400 billion in short-term Treasuries in order to buy longer-dated government bonds.
The effects of these operations is uncertain, but is likely to be relatively small. My sense is that the main effect will be to raise inflation somewhat rather than increase growth, he argued in his prepared remarks.
Lacker will rotate into a voting seat on the Fed's policy setting Federal Open Market Committee next year. He argued that a recent spate of dissents against the Fed's latest monetary easing drive was a sign of healthy internal debate, not a fractured central bank.
The U.S. economy has remained anemic this year despite hopes for a pick up in the pace of expansion. Gross domestic product expanded under 1 percent in the first half of the year, while unemployment has remained stuck above 9 percent for several months.
This backdrop, coupled with financial market strains emanating from Europe, have kept up the pressure on the Fed to continue providing support to the economy, despite its already unprecedented efforts to that effect in response to the Great Recession.
The Fed has not only slashed benchmark interest rates to effectively zero, but also purchased some $2.3 trillion in government and mortgage-backed securities to support a fragile recovery.
Lacker said MBS purchases, which got a fresh boost in September as the Fed decided to reinvest maturing mortgage bonds back into that market, were not well-advised.
It's simply inappropriate, in my view, for a central bank to attempt to channel credit toward some economic sectors and away from others, he said.
(Reporting by Pedro Nicolaci da Costa; Editing by Diane Craft)