Fed’s Lacker pours cold water on monetary policy thresholds plan

City A.M. Reporter
A TOP Federal Reserve official yesterday challenged an idea that is gaining traction at the US central bank, arguing that adopting so-called thresholds to guide policy would be a risky move that fails to take account of broader economic conditions.

Richmond Fed president Jeffrey Lacker also floated the idea that legislation might be necessary to limit the Fed’s emergency lending activities, if the central bank cannot limit itself.

But Lacker spent much of his speech pouring cold water on an idea publicly endorsed by a few Fed policymakers, including influential vice chair Janet Yellen: setting specific rates for unemployment and inflation as markers for when the Fed would consider lifting rates.

“Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do not always capture the rich array of policy-relevant information about the state of the economy,” Lacker told the Shadow Open Market Committee.

Lacker, an inflation hawk who has dissented at every Fed policy-setting meeting this year, said placing great weight on the jobless rate alone “can easily lead you astray”, given the complexity of factors that influence the labour market. Adopting an inflation threshold, in particular, “essentially requires that we lose a measure of credibility before it can be invoked,” he said. This is because even if the unemployment rate remains stubbornly high, a rise in inflation would be necessary to reverse monetary policy, he added.