Fed's Lacker warns on monetary policy "thresholds" plan

NEW YORK (Reuters) - A top Federal Reserve official on Tuesday challenged an idea that is gaining traction at the U.S. central bank, arguing that adopting so-called thresholds to guide policy would be a risky move that fails to take into account broader economic conditions.

Richmond Fed President Jeffrey Lacker used a speech in part to pour 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 interest 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 said at a meeting of the Shadow Open Market Committee, a private organization that analyzes monetary policy.

Lacker, an inflation hawk who has dissented at every Fed policy-setting meeting this year, said "one or two" thresholds do not always capture the "rich array" of economic information the Fed needs to consider in setting monetary policy.

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 in order to finally reverse monetary policy.

The idea of thresholds has been increasingly debated at the last few policy meetings of the central bank. A few Fed policymakers have even pitched their own specific proposals, including Chicago Fed President Charlie Evans, credited with hatching the plan.

Evans, for example, wants ultra-low rates as long as the jobless rate remains above 7 percent - unless inflation rises to 3 percent. U.S. unemployment was 7.9 percent last month, while inflation has remained slightly below the Fed's 2-percent target.

The thresholds would likely replace the Fed's use of a calendar date - currently mid-2015 - to signal how long it expects to keep rates near zero, where they have been since late 2008 to help the U.S. economy recovery from the recession.

Lacker said the calendar date can confuse investors who misinterpret it as Fed pessimism on the state of the economy. He argued the Fed could "provide some sense of the economic conditions under which it's likely to begin raising rates and reducing the size of its balance sheet."

"But it's important to avoid spurious precision," he said.

The central bank has also bought more than $2.3 trillion in assets to boost the recovery and get Americans back to work.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and James Dalgleish)

Source: http://news.yahoo.com/feds-lacker-warns-monetary-policy-thresholds-plan-140321317--business.html

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