The US central bank´s policy of quantitative easing now faces constraints on its usefulness for delivering economic stimulus. Yet it also entails greater risks.
That is the opinion of the President of the Federal Reserve bank of Richmond, Jeffrey Lacker, delivered today at the Swedbank economic outlook seminar, in Stockholm.
As nominal short-term interest rates approach zero, the so-called "zero lower bound," the ability of the Federal Reserve to deliver additional stimulus becomes limited.
That is not to say that he thinks that the current inflation target might be compromised. He does not, yet "surely it indicates a willingness to tolerate a greater risk of keeping rates too low for too long," he reportedly said.
For that reason, "The need for vigilance regarding the emergence of these risks suggests that we pay more attention to monetary and bank credit aggregates than we typically do in more conventional times," the central banker added.
Lacker also criticized the Fed's purchase of mortgage-backed securities as channeling credit to a specific segment of the economy, Bloomberg reports.
"Of the risks associated with unconventional monetary policies, those associated with central bank holdings of unconventional asset classes may be the most consequential," Mr.Lacker went on to explain.
Tapering should start in October
With more immediate implications, this policy-maker said he sees no reason not to taper as early as October.
To be had in account, he is a well-known "hawk."
However, his opposite number at the St.Louis Fed, James Bullard, is rather the opposite, a well-known "dove."
Yet in his latest speech Mr.Bullard also referenced the possibility of an October start to Fed tapering.
Getting the message across
No less relevant, if not more so given the volatility seen in global capital markets over the last few months, Mr.Lacker reportedly remarked that it is going to be harder for the Fed to communicate credibly in the future.
He is not the only market observer who sees this possibility. For example, in today´s Financial Times James Mackintosh writes that: "The Fed has undermined its credibility by giving too much certainty."
Acting as a backdrop, just recently a client survey undertaken by Barclays Research showed that it was the Federal Reserve which received the highest marks for its communication policy.
Ironically, that comes after several years during which the Fed has adopted some of the practices of other central banks, such as the European Central Bank´s press conferences after each rate-setting meeting (not too many years ago it was the ECB who was judged to be the best communicator).
Having said that, one can only wonder if investors´ perceptions of a central bank´s communications do not also reflect how satisfied they are with its decisions.
In any case, personally I would warn that the Federal Reserve´s current mission - to succesfully extricate the US economy from quantitative easing - may simply not allow for pleasing everyone, besides being extremely complex to undertake.
So in the final analysis, to a certain extent good communications may be of little use if the message is unwelcome. Even so, in the medium-term the Fed´s job will probably be made that much easier by the underlying flexibility and dynamism of the US economy.