Fed's Latest Stimulus Lacked Unanimous Support

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the lone dissenting vote in a 12-member body that authorized a new, open-ended round of quantitative easing this week designed to tackle the persistently high unemployment rate. Lacker talks with weekends on All Things Considered host Guy Raz about his vote and the stimulus.

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GUY RAZ, HOST:

Four years ago today, Lehman Brothers announced it would file for bankruptcy. Now, that announcement was the proverbial canary in the coal mine for what was about to happen to the financial sector. And four years on, while the economy has recovered from its low point, economic growth is still sluggish and the jobless rate is still very high. Enter the Federal Reserve.

For the third time in as many years, the Fed announced a new round of quantitative easing this past week by a vote of 11-1. It means the central bank will buy billions of dollars in financial assets, this time mortgage-backed securities. The idea is to stimulate the economy with the hope that more jobs will be created. And to do that, the Fed has to print more money.

But some economists worry it'll raise inflation, including Jeff Lacker. He's the president of the Richmond Federal Reserve. He was the lone dissenter on the Fed committee that made the decision.

JEFFREY LACKER: The effects are very hard to gauge, but my sense is that this is going to have a greater effect on inflation and a minimal impact on jobs. And while asset purchases are not without some costs and risks down the road, at some point, we're going to need to sell these securities and raise interest rates when the economy recovers more fully. And the larger a balance sheet is, I think the riskier that process becomes. It becomes more sensitive to fine errors and trickier to get out of the large asset positions we're in.

RAZ: Now, this time, it's somewhat different because the Federal Reserve is going to buy mortgage-backed securities. Why mortgage-backed securities?

LACKER: Well, that's a good question and that's a very controversial aspect to this decision as well, an aspect I opposed as well. I think the theory behind it, first of all, it's a deep and liquid market, and the impetus, I think, is to aid the housing market. That's an area that's fallen short in this recovery. In most other U.S. postwar recoveries, we've seen a pretty sharp snapback in housing.

Of course, the reason it hasn't come back in this recovery is that this recession was essentially caused by us building too many houses prior to the recession. We still have a huge overhang of houses that haven't been sold that are vacant. And it's going to take us a while before we want the houses we have, much less need to build more.

RAZ: It has been pointed out that we are marking the fourth anniversary of the collapse of Lehman Brothers and yet the government is still in a position where it finds that it has to intervene. Can you understand the position of most - in fact, of all of your colleagues here who look at the economy, say, look, it's growing at a sluggish pace, and we don't really have many options? There isn't a whole lot of cooperation on Capitol Hill, and this is one of our tools in the toolbox to see if we can get the economy, you know, moving ahead.

LACKER: I think we're all frustrated by the pace of the recovery. If you look, though, back at history, this lines up with a lot of other recoveries from similar deep recessions that involve banking and financial disruptions. About 2 percent a year is what's typical for an advanced economy coming out of a recession like the one we've had. It's frustrating because of the elevated level of unemployment and the human suffering and dislocation that involves.

And I think we all understand what a lot of households are going through. I think we differ on the efficacy of the tools we have available. And I think we just need some patience right now on the central bank side.

RAZ: What would you do or what would you want your colleagues to do instead of this in an effort to boost the economy? What are the options?

LACKER: I don't think there's much that monetary policy's capable of doing to really healing labor markets right now. I think it requires a lot of little small things all over the economy - training workers better, reducing the overhang of uncertainty having to do with the fiscal situation at the federal level and the like. And I just don't think it's something that we can do a lot about. The real economy is beyond our ability to influence in large measure at this point.

RAZ: And if it does work out, would you be prepared to come out and say, you know what, it worked out. I was wrong. I should have voted for it.

LACKER: Of course.

RAZ: That's Jeff Lacker. He's the president of the Federal Reserve Bank of Richmond. He spoke to us from his office there. Jeff Lacker, thanks so much.

LACKER: Good to be here.

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