–Thought Risks of Quantitative Easing Outweighed Benefits
–Don’t See Deflation as Major Risk
–‘Grossly Unfair’ to Say QE2 Qualifies as Currency Manipulation

By Heather Scott

RICHMOND (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker Sunday night said the central bank has the tools it needs to
execute an exit from the monetary policy stimulus in the system, but the
tricky part will be getting the timing right.

Responding to questions following a speech to a conference of high
school advanced placement economic teachers, Lacker said the Fed has
multiple tools to monitor inflation to gauge the best time, but it will
require exceptional vigilance.

Lacker also said it was “grossly unfair” to charge the Fed with
trying to manipulate the dollar with the latest round of quantitative
easing.

However, speaking to reporters later, he acknowledged he was not a
supporter of the Fed’s Nov. 3 decision.

“The Fed has the tools to be able to withdraw the monetary policy
stimulus that we’ve provided,” he told the teachers, including raising
interest rates on reserves, and there should be no trouble selling
Treasury debt.

“The tricky part is figuring out when and how fast to do that.
That’s a real delicate matter,” he said. “There’s always some lingering
concern. There’s always some pocket of lagging sectors in the economy”
that might tempt policymakers to hold out longer.

And he told reporters that eventual sales of Treasuries is unlikely
to disrupt the Treasury market which is the “deepest and broadest market
in the world.

On the inflation outlook he said he is comfortable with the current
rate, though some in the Fed would like to see a slightly higher rate,
and “right now it is not giving me discomfort that we have gone or are
expected to go too far.”

At the same time he said “I don’t think deflation major risk for us
right now,” although he noted the possibility of deflation was one
factor cited by supporters of QE2.

Asked his position on the move, Lacker said, “I was one who thought
the risks exceeded benefits. It didn’t seem to me the likely effects on
real growth would be terribly large.”

And, he added, “I was worried about overshooting on the inflation
rate.”

Asked about charges heaped on the Fed, from China in particular,
that quantitative easing was just a way to lower the U.S. dollar for
competitive advantage, Lacker was dismissive.

“It’s important to remember that in any open economy, monetary
stimulus is going to affect the external value of the currency. It’s
always a component. … It’s always going to be a component of monetary
stimulus for whatever country.

“To say this is aimed at reducing the dollar is unfair. To call it
manipulation is grossly unfair,” Lacker said.

He also denied the purpose of quantitative easing is to monetize
the debt.

** Market News International **

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