Tuesday, 05 Mar

The Federal Reserve's aggressive monetary stimulus will make it harder for the U.S. central bank to engineer a smooth retreat from its unconventional policies, a top Fed official said on Tuesday.

"I fear that small mistakes (could have) large consequences," said Jeffrey Lacker, President of the Federal Reserve Bank of Richmond and an inflation hawk who has been skeptical of central bank bond buying.

In response to the financial crisis and deep recession of 2007-09, the Fed more than tripled the size of its balance sheet to around $3 trillion as it purchased Treasury and mortgage-backed securities in an effort to keep long-term interest rates low.

But Lacker, speaking to the spring policy meeting of the National Association of Business Economics, said he worried that a "gigantic" quantity of reserves in the financial system could make it more difficult for the Fed to withdraw liquidity when the time comes.

The central bank has made clear that juncture is not on the horizon for now. Indeed, the Fed continues to ease monetary policy with $85 billion monthly purchases of securities.

It has vowed to continue buying assets until there is substantial improvement in the outlook for jobs.

U.S. unemployment remains elevated at 7.9 percent while the economy, which stalled in the fourth quarter, is expected to expand around 2 percent this year, still too slow to make up ground lost during the worst recession in generations.

Despite Lacker's skepticism about asset purchases, he said the central bank remains committed to price stability. He touted the Fed's ability to pay interest on bank reserves, acquired in 2008, as an important tool that should help policymakers engineer a smooth pullback from extraordinary stimulus measures. 

© Thomson Reuters 2013 All rights reserved