Jeffrey Lacker: Lone FOMC Dissident On QE3

Jeffrey M. Lacker, President, Federal Reserve Bank of Richmond, has been the only dissident in the past six FOMC meetings.

Mr Lacker has been President the Richmond Fed since August 2004 and is a voting member of the FOMC in 2012, and was so in 2006 and 2009. He holds a bachelor of arts degree in economics from Franklin and Marshall College and a Ph.D. in economics from the University of Wisconsin. He joined the Bank in 1989 as an Economist and rose to President in 2004.

At its last meeting, the U.S. Fed announced a new-fangled quantitative easing that was virtually unlimited in scope, setting no limits on monetary amounts or time frame. For the first time, it was linked to the performance of the employment market of the country and relied entirely on purchases of mortgage backed securities. The meeting decided to keep interest rates at near-zero levels well into 2015.

As usual, Mr Lacker was conspicuously the lone dissident, and the statement from the FOMC said the following about his stance:

“Voting against the action was Jeffrey M Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.”

Mr Lacker released his own statement about his position on the matter. He justified his dissent on the grounds that further purchases of assets may not result in an appreciable amount of growth but may, on the other hand, cause inflation to rise. He also objected to the use of monetary policy as a means to correct high unemployment which, in his view, “has been held back by real impediments that are beyond the capacity of monetary policy to offset.” The risk here is, again, inflation. Further, he took objection to the decision of the FOMC to keep low rates of interest into 2015, saying, “such an implied commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.” Lastly, he voiced his opposition to the purchase of mortgage-backed securities as a vehicle for the monetary easing, specifically intended to reduce interest rates on home mortgages. In his view, “channelling the flow of credit to particular economic sectors is an inappropriate role of the Federal reserve.”

It is pertinent to note that the FOMC statement did not mention Mr Lacker’s objections to the use of monetary policy to improve conditions in the labour market and the specific use of mortgage-backed securities to lower interest rates in the housing market. In fact, this third quantitative easing is notable for its priority on employment and the recovery in the housing market through the use of buying mortgage backed securities. It is obvious, therefore, that Mr Lacker has differing views on the most fundamental thrusts of QE3.

In a speech on May 7, Mr Lacker made the important point that unemployment was seemingly the result of a growing mismatch between skills required and those available in the unemployed force.

The rise in long-term unemployment across a wide range of occupational and industry groups provides additional evidence that mismatch is an important factor restraining labor market performance…many of the long-term unemployed had been working in declining industries or occupations and cannot easily transfer their skills to newly available jobs.”

If research can corroborate that such structural imbalances continue to operate in the country’s employment market, then Mr Lacker’s point that monetary easing may have only a limited effect on unemployment, maybe quite valid.

In another speech on May 2, Mr Lacker looked at the housing problem from first principles. In his view, the housing market was suffering from a surfeit of homes that were built during the boom times far in excess of what was justified by population growth and rising incomes. Though other factors such as lax lending standards and banking greed played a role, the end result was many areas with large numbers of vacant houses. This will likely only be solved through a lengthy adjustment process such as absorption via population growth, painful foreclosures and a reassessment of the affordability of a family’s currently occupied home.

“Over time, we’ll see a better match between households and the housing they want to own or rent, and in an increasing number of local markets, we will see the overhang of vacant homes diminish to the point that significant construction increases are warranted. It’s hard to predict just when these tipping points will be reached, and we will need to build houses at a rate in line with the growth in the number of households, but my sense is that we are several years away.”

Though recent numbers from the housing industry point to a nascent recovery, if such a basic structural infirmity exists in housing, how far this can be corrected by lowering industry interest rates through related asset purchases may be a moot point.

The latest monetary easing is also unique because it addresses an economy that is in gradual recovery mode rather than one that is down in the dumps. It therefore attempts to boost the momentum of recovery, rather than spark growth where none exists.

Given this fact, a sweeping declaration that low interest rates would prevail into 2015, without linking to underlying growth, would understandably be unacceptable to Mr Lacker who has traditionally been one of the more hawkish participants in the FOMC proceedings.

Mr Lacker calls this “forward guidance language” in his May 2 speech, and is at odds with it because in his view, it would be difficult to control inflation at 2 percent without the need to raise interest rates sometime in 2013.

Mr Lacker’s concerns are echoed by Peter Schiff, who calls QE3 “Operation Screw” because the resultant debasement of the dollar would screw all holders of bonds, savings accounts, retirees and all employees paid in the Dollar. Schiff’s view is that QE3 would end up creating another housing bubble, and he ridicules the Fed’s logic that rising home prices would create a wealth effect that would encourage Americans to spend money due to the notional increase in their home equity. He is of the view that inflation would result and advised investors to buy gold, silver, emerging markets equities, shares of companies that derive most of their income in foreign markets and commodities.

Like this article? Get ECN delivered to your inbox daily. Subscribe here.

Leave a Comment