The Federal Reserve's move to purchase an additional $600 billion in bonds carries risks and should be reviewed on a regular basis, Richmond Fed President Jeffrey Lacker said on Monday.
Lacker, one of the central bank's vocal hawks, said the decision to increase monetary stimulus was based primarily on weakness in the labor market and set a precedent he said threatens future inflation.
The provision of further monetary stimulus at this point in the business cycle is not without risks, Lacker told a conference sponsored by the Charlotte Chamber of Commerce in North Carolina.
Historical experience, including the inception of the Great Inflation of the 1970s, suggests central banks should be careful not to steer monetary policy off course by targeting the unemployment rate, he said.
His comments come a day after Fed Chairman Ben Bernanke, a strong advocate of the policy, told CBS television program 60 Minutes that inflation fears associated with Fed policy are way overstated.
Bernanke also did not rule out an increase in bond purchases beyond $600 billion if the economy fails to respond. He added that the risk of deflation, a corrosive downward spiral in wages and prices, was receding in large part due to the Fed's efforts to stimulate growth.
Lacker, who is not a voting member this year on the policy-setting Federal Open Market Committee, has hinted strongly at his opposition to the November decision to ease.
With many commodity prices spiking, outright deflation is clearly even less of a risk than it was a few months ago, Lacker said.
He said inflation is well contained and very close to my own long-term objective, putting him at odds with other officials at the central bank, who are worried about a recent trend of disinflation and dire employment conditions.
Contradicting Bernanke's view that the economy is close to the border of being sustainable, Lacker argued growth already had enough momentum of its own.
EUROPE RISK MANAGEABLE
Asked about the situation in Europe, where markets have taken a beating over fears of possible defaults in some of the continent's more indebted nations, had only minor risks for the United States for now.
At this point it looks like the magnitude of the likely fall out for the United States economy is relatively manageable and relatively minor, he said.
If broader, deeper growth effects were to hit Europe, if they were to enter a substantial recession again, bets would be off and there could more substantial effects.
Regarding U.S. monetary policy, Lacker said he worries that more aggressive action by the Fed now could lead to a potentially turbulent day of reckoning down the line.
Further balance sheet expansion now could require more rapid balance sheet reduction later on, complicating the withdrawal of monetary stimulus, he said.