By Dow Jones Business News, November 01, 2013, 03:15:00 PM EDT
PHILADELPHIA--One of the Federal Reserve's biggest inflation fighters confessed Friday he's been caught off guard when
he sees how calm price pressures have been in the face of epic levels of central bank stimulus.
Speaking in Philadelphia, Federal Reserve Bank of Richmond President Jeffrey Lacker said, "I have been surprised by
the stability of inflation and inflation expectations."
"Given the expansion of our balance sheet, if you told me we were heading to a $4 trillion balance sheet, $4 trillion
of outside money in the system, and that inflation expectations have remained stable, and apparently as a result
inflation itself has remained remarkably stable, I wouldn't have put 99% probability on that. I would have put much less
probability on that," Mr. Lacker said in response to audience questions.
Mr. Lacker has been a persistent critic of central bank efforts to drive up growth and lower unemployment via rock
bottom interest rates and campaigns of bond buying. One of his most persistent concerns has been that Fed actions will
drive up price pressure to levels considered unacceptable to the central bank. To that end, Mr. Lacker was a dissenter
at monetary-policy-setting Federal Open Market Committee meetings when he last held a voting role in 2012.
Many other opponents of Fed actions have also feared the central bank would itself be the author of a surge in
inflation. Currently, price pressures remain well below the Fed's 2% inflation target.
Mr. Lacker said that even though he is surprised Fed actions have not unleashed a wave of inflation, he is not willing
to argue its policy choices have been correct. He argued one reason why inflation may not have budged in the face of
extreme action is that the Fed has earned its reputation over many years as an inflation fighter.
Because the current calm on prices may be tied to this public vote of confidence, Lacker said he is uneasy. "I
remain...as a central banker constitutionally unwilling to take that (confidence) for granted, because it does rest on
credibility," he said. "Credibility can erode."
While Mr. Lacker did not have any direct comments on the Fed's decision to continue forward with its $85 billion per
month bond buying program earlier this week, he repeated he doesn't think it is doing much for the economy. He added "
nobody thinks we can go on forever" with these purchases.
The effect of Fed bond buying is "highly uncertain" and research shows an influence of "modest effect to virtually no
effect" for the asset buying that current defines central bank stimulus.
Write to Michael S. Derby at email@example.com
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