Lacker says Fed's power to fix economy now limited

WASHINGTON (AP) ? A voting member of the Federal Reserve's policy committee cautions that the Fed's power to fix the U.S. economy now is limited.

Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, said Wednesday in an interview with The Associated Press that the Fed can only do so much to lower the 8.3 percent unemployment rate.

"There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets," Lacker said.

Lacker alone has dissented from the past five Fed statements that sketched out steps intended to bolster the economy. He has maintained that the Fed has done what it can to bolster a weak economy and that going further risk of triggering high inflation.

Financial markets are hoping the central bank will launch a third round of bond buying at its Sept. 11-12 meeting to try and jump-start economic growth. The bond purchases are designed to push long-term interest rates down and generate more borrowing and spending.

The Fed signaled at its meeting in late July that it is ready to act if growth remains weak and unemployment stays high.

Lacker's comments stand in contrast to those from Fed Chairman Ben Bernanke, who told Congress last month that he still believed the central bank had the ability to provide more support to the economy. He said the Fed would be ready to provide more aid if it looked like such support was needed to drive the unemployment rate down further.

In a wide-ranging interview, Lacker explained why he has objected to the Fed's language in all five statements this year that said it planned to keep a key interest rate at record low levels until at least late 2014.

Lacker said use of a specific date was confusing to financial markets. He said the most likely time for the Fed to begin raising interest rates was late 2013 and he said a rate move could be needed as soon as early next year.

The central bank has kept its benchmark interest rate, the interest that banks charge each other, at a record low of zero to 0.25 percent since December 2008. It began including a date for how long rates could stay at that low level in August 2011 when it said the plan was to keep rates at exceptionally low levels until at least mid-2013.

It extended that date to late 2014 at its meeting and January and has retained that language at meetings since then.

Some Fed analysts said that the central bank could well extend the 2014 date into 2015 if the economy remains weak. They expect Bernanke could get support for such a move from other Fed officials who seem high unemployment as a greater threat now to the economy than inflation.

Associated Press

Source: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2012-08-15-Fed-Lacker/id-c13fdf67ca4543e48e2b708dd5eaef94

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