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Article updated: 8/16/2012 7:24 AM

Lacker says Fed's power to fix economy now limited

Jeffrey Lacker

Jeffrey Lacker

 

Bloomberg News

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By Associated Press

WASHINGTON -- A voting member of the Federal Reserve's policy committee is cautioning that the Fed's power to fix the U.S. economy is limited now.

Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, said Wednesday in an interview with The Associated Press that the Fed can only do so much to lower the 8.3 percent unemployment rate.

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"There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets," Lacker said.

Lacker alone has dissented from the past five Fed statements that sketched out steps intended to bolster the economy. He has maintained that the Fed has done what it can to bolster a weak economy and that going further risks triggering high inflation.

Financial markets are hoping the central bank will launch a third round of bond buying at its Sept. 11-12 meeting to try and jump-start economic growth. The bond purchases are designed to push long-term interest rates down and generate more borrowing and spending.

The Fed signaled at its meeting in late July that it is ready to act if growth remains weak and unemployment stays high.

Lacker's comments stand in contrast to those from Fed Chairman Ben Bernanke, who told Congress last month that he still believed the central bank had the ability to provide more support to the economy. Bernanke said the Fed would be ready to provide more aid if it looked like such support was needed to lower the unemployment rate.

In a wide-ranging interview, Lacker explained why he has objected to the Fed's language in all five statements this year. The statements have said that the Fed plans to keep a key interest rate at record low levels until at least late 2014.

Lacker said use of a specific date was confusing to financial markets. He said his forecast for the most likely time for the Fed to begin raising interest rates was late 2013 and he said a rate move could be needed as soon as early next year.

On other topics:

---- Lacker described the economy as growing at an uneven pace in recent quarters with stronger growth followed by a slowdown earlier this year. He said the economy seemed to have entered the July-September quarter with "some momentum." He said he believes inflation would be "a little less favorable" in coming months.

---- He expressed strong concerns about legislation that has been approved by the House that would expand the ability of Congress to audit the operations of the Federal Reserve. "This seems to be clearly designed to give Congress an ability to harass us, intimidate us and to politicize monetary policy," Lacker said of the legislation sponsored by long-time Fed critic Rep. Ron Paul, R-Texas. The legislation must win approval in the Senate to become law.

---- He said that bank regulators have made progress in dealing with the too-big-to-fail problem in which certain financial institutions are viewed as being too critical to the financial system to be allowed to fail. But he said more needed to be done in this area because markets are still behaving as if the government will bail out some institutions rather than let them fail.

The central bank has kept its benchmark interest rate, the interest that banks charge each other, at a record low of zero to 0.25 percent since December 2008. It began including a date for how long rates could stay at that low level in August 2011 when it said the plan was to keep rates at exceptionally low levels until at least mid-2013.

It extended that date to late 2014 at its meeting in January and has retained that language at meetings since then.

Some Fed analysts said that the central bank could well extend the 2014 date into 2015 if the economy remains weak. They expect Bernanke could get support for such a move from Fed officials other than Lacker who see high unemployment as a greater threat now to the economy than inflation.

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