By Steven K. Beckner

MARKET NEWS INTERNATIONAL – Richmond Federal Reserve Bank President
Jeffrey Lacker voted against extending the Federal Open Market
Committee’s expected period for keeping the federal funds rate very low
by another year and a half Wednesday because the funds rate will likely
have to be raised sooner, he said in a statement posted just after
midnight on the Bank’s website on Friday.

If the funds rate is not raised before the end of 2014,
inflationary pressures will result, warned Lacker, who also disputed the
need for such “forward guidance” now that the FOMC is incorporating
funds rate forecasts in its quarterly, three-year Summary of Economic
Projections (SEP).

Although the Fed announced federal funds rate forecasts by all FOMC
participants for the first time Wednesday, the actual voters on the
Fed’s policymaking committee continued to issue “forward guidance” on
the likely path of the funds rate. And that did not sit well with
Lacker, one of this year’s voters.

After reaffirming that it will keep the funds rate in the zero to
25 basis point range, where it has been for more than three years, the
FOMC added that it “currently anticipates that economic conditions —
including low rates of resource utilization and a subdued outlook for
inflation over the medium run — are likely to warrant exceptionally low
levels for the federal funds rate at least through late 2014.”

Since August, the FOMC had been saying it expected the funds rate
to stay “exceptionally low” “through at least mid-2013.”

Although the statement does not specifically say that the funds
rate is likely to stay in the zero to 25 basis point range for that
long, the reference to “exceptionally low” rates is widely interpreted
as meaning just that.

The policy statement said Lacker dissented because he “preferred to
omit the description of the time period over which economic conditions
are likely to warrant exceptionally low levels of the federal funds
rate.”

Elaborating in his statement, Lacker went considerably further to
explain why he opposed saying the funds rate should stay “exceptionally
low … at least through late 2014.”

“I dissented because I do not believe economic conditions are
likely to warrant an exceptionally low federal funds rate for so long,”
he said.

“I expect that as economic expansion continues, even if only at a
moderate pace, the federal funds rate will need to rise in order to
prevent the emergence of inflationary pressures,” Lacker continued.
“This increase in interest rates is likely to be necessary before late
2014.”

Lacker also observed that the SEP “now contains detailed
information on the forecasts of Federal Reserve governors and Reserve
Bank presidents for the evolution of economic conditions and the federal
funds rate under appropriate policy” and suggested this renders forward
guidance language in the policy statement itself unnecessary.

“My dissent also reflected the view that statements about the
future path of interest rates are inherently forecasts and are therefore
better addressed in the SEP than in the Committee’s policy statement,”
he said.

When MNI asked Federal Reserve Chairman Ben Bernanke, in his
post-FOMC press conference, about the rationale for continuing to give
forward guidance on the funds rate path on top of the funds rate
forecasts, he made a distinction between the former representing the
views only of the 10 FOMC voters, while the latter reflect the views of
all 17 FOMC participants.

Bernanke said “the reason that we just don’t release the economic
projections and leave it at that, is because while the economic
projections of future policy rates are an important input to our policy
discussions, around the table, the decision ultimately is made by the
Federal Open Market Committee, you know, which is the voters, sitting
around the table, and in the process by which we exchange ideas and make
arguments and come to collective determination.”

“So we don’t set the federal funds interest rate by having members
send in their vote and not having a meeting,” he said. “We have a
meeting for a reason, which is to talk to each other and try to come to
some kind of consensus.”

“So the FOMC will always in some sense trump the projections of
forward interest rates, but clearly because the participants and people
around the table are the same, the projections should give significant
information about where the FOMC is likely to go,” he added.

Lacker has been a supporter of more transparent FOMC
communications, and he gave a largely favorable view of including funds
rate forecasts with economic projections in the SEP:

“The economic projections we submit four times a year now include
Committee participants’ forecasts for the likely path of the federal
funds rate under appropriate monetary policy,” he said. “That is, each
participant, given his or her views on how economic fundamentals are
most likely to evolve, states how he or she believes monetary policy
will need to respond in order to best fulfill our goals.”

“After the meetings, when our projections are submitted, the
Chairman’s press conference provides further perspective on the
Committee’s thinking and its deliberations,” he noted.

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