The Federal Reserve's effort to assure the public that interest rates will remain near zero for years could have the perverse effect of hurting confidence and damaging economic growth, a top Fed official said on Thursday.
Jeffrey Lacker, president of the Richmond Fed, offered a conference in Stockholm a taste of his hawkish skepticism of the U.S. central bank's unconventional monetary policies.
Lacker has been critical of the Fed's asset purchases, particularly of mortgages, which he says constitute fiscal policy and open the central bank to greater political meddling.
But on Thursday, Lacker also took aim at a tool top policymakers have touted as having increasing importance in the Fed's arsenal, and which is also being employed in Europe and Britain — rates guidance.
"Forward guidance could have the paradoxical effect of reducing current economic activity, by reducing expectations about the level of future economic activity," Lacker said at the Swedbank economic outlook seminar, in prepared remarks received in Washington.
The other danger is that the combination of an enlarged balance sheet, now at $3.7 trillion, and the promise of low rates for a prolonged period could make it more difficult for the Fed to pull back gracefully, he said.
"Our current unconventional policies may make it more likely that we act too slowly when it's time to raise rates, and may make such a delay more costly," argued Lacker.
He echoed market concerns about Fed communications following the unexpected decision not to start reducing the central bank's monthly $85 billion in bond purchases this month.
"Credibility requires consistency, over time, between a central bank's statements and its actual subsequent actions," he said.
"Widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements."
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