Lacker says Fed should consider reducing bond buys

By Pedro Nicolaci da Costa

CHARLOTTE, North Carolina (Reuters) – The Federal Reserve should think about trimming its $600 billion bond-buying stimulus as the economy shows signs of improvement and hints of inflation, Richmond Fed President Jeffrey Lacker said on Thursday.

“I haven’t made up my mind yet. The flow of data since December has made me think it’s even more worth examining,” Lacker told reporters at a conference sponsored by his bank.

James Bullard, president of the St. Louis Fed, shook global financial markets over the weekend when he suggested the Fed’s bond purchases might be cut short. Lacker, considered an inflation hawk, appeared to be largely on the same page.

“Every $100 billion counts,” he said. “Even if we’re getting close to the end I still think it’s worth considering.”

Lacker, who said any spillover effects on the U.S. economy from Japan’s disaster will be transitory, said inflation risks have been growing. In particular, he said a recent increase in long-term inflation expectations was unsettling.

Many analysts say rising gasoline prices are causing consumers to worry about broader-based price increases, raising the threat of a future inflationary spike.

Lacker argued that recent low readings of inflation do give the U.S. central bank some wiggle room, but added that policymakers should remain vigilant.

“At this point in the business cycle, the risk of overshooting, of getting a bigger ratcheting up of inflation than we want, is very real,” Lacker said.

The U.S. economy expanded 3.1 percent in the fourth quarter of last year, but the unemployment rate remains at an elevated 8.9 percent, though it has come down recently in recent months.

Economists disagree on the ability of monetary policy to address the problem. Lacker tends to think a significant portion of U.S. joblessness is due to factors other than the weakness of private demand, making them less responsive to lower borrowing costs.

Inflation, for its part, has been moving higher, just months after many economists and Fed officials appeared worried about the threat of deflation.

U.S. consumer prices jumped 0.5 percent in February on the back of energy costs, which have been pushed higher by turmoil in the Middle East and North Africa. In the year to February, consumer prices were up 2.1 percent.

The Fed’s implicit target for inflation is 2 percent or a bit below.

Lacker says Fed should consider reducing bond buys