Fed’s Lacker sees QE3 mortgage bond buys as wrong economic cure

Federal Reserve Bank of Richmond President Jeffrey Lacker admitted Friday that he dissented at all six of the Federal Open Market Committee meetings this year because he remains opposed to specific parts of the Fed’s quantitative easing policies.

Lacker’s most well-known objection is his vote against the Fed’s most recent decision to launch QE3, which is essentially another round of mortgage-backed securities acquisitions with an open-ended closing date.

While speaking at the University of Virginia Friday, Lacker said he supports keeping interest rates low, but believes MBS purchases by the Fed reduce borrowing rates for conforming home loans while lifting interest rates for other borrowers.

This type of formula can “distort credit flows,” he explained.

“I believe that the benefits of that action are likely to be small, because it’s unlikely to improve growth without also causing an unwelcome increase in inflation,” he explained. “At the same time, adding to our balance sheet increases the risks we’ll have to move quickly when the time comes to normalize monetary policy and begin raising rates.”

Lacker told the audience the U.S. lost 8 million jobs in the recession and has only added back a little over 4 million positions.

Still, the realities of today’s economic situation are quite clear, according to Lacker. Going forward, the nation’s economic stability will be largely dictated by tax and spend policies at the government level, he suggested.

“Finally, the political gridlock that has delayed remedies to our unsustainable federal fiscal path has meant paralyzing uncertainty across the vast range of fiscal policy touch points in the economy,” Lacker told the crowd.

“This appears to have seriously dampened investments and hiring for the new business ventures that typically would take up the economic slack caused by one sector’s decline,” he said. “Should they all take effect, the spending cuts and tax increases that will automatically occur next year if Congress fails to act — the so-called fiscal cliff — will likely cause the economy to contract and move back into a recession.”

Click here to read the full speech.

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