Richard Lacker, president of the Federal Reserve Bank of Richmond, warned this week that additional mortgage-backed securities purchases will put consumers at risk of inflation since it artificially steers the flow of credit towards the housing market.

The Federal Open Market Committee said this week it will continue purchasing agency mortgage-backed securities at a pace of $40 billion a month. The perceived objective is to lift the housing market by keeping interest rates low through the repurchases while keeping the target federal funds rate near zero.  

"Purchasing MBS can be expected to reduce borrowing rates for conforming home mortgages by more than it reduces borrowing rates for nonconforming mortgages or for other borrowing sectors, such as small business, autos or unsecured consumer loans," Lacker said in a press statement. "Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve."

Lacker believes the economy is growing at a modest pace and inflation is near the 2%-point. Too much stimulus may disrupt that balance, he explained.

"I do not believe that a policy conforming to this characterization would be appropriate, because it implies providing too much stimulus beyond the point at which rate increases will be required to keep inflation in check," Lacker said. "Such an implied commitment would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates."