Fed’s bold dissenter hopes his doubts are wrong

Last year, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., cast the sole dissenting vote at each of the eight meetings of the Fed’s policymaking committee, only the third time in history a Fed official dissented so regularly.


RICHMOND, Va. — Jeffrey Lacker, the Federal Reserve’s most persistent internal critic, does not much resemble a firebrand. He is personally cheerful, professionally inclined to see both sides of an issue and quick to acknowledge he may not be right. He says he would rather be wrong.

But for the past several years, Lacker, president of the Federal Reserve Bank of Richmond, has warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate. Worst of all, he believes, the Fed is undermining its hard-won ability to control inflation.

Last year, Lacker cast the sole dissenting vote at each of the eight meetings of the Fed’s policymaking committee, only the third time in history a Fed official dissented so regularly.

“We’re at the limits of our understanding of how monetary policy affects the economy,” Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”

As the Fed enters the sixth year of its campaign to revitalize the economy, the debate between the Fed’s majority and Lacker — whose views are shared by others inside the central bank, as well as by some outside observers — highlights the extent to which the Fed is operating in uncharted territory, making choices that have few precedents, unclear benefits and uncertain consequences.

The economy continues to muddle along, shadowed by the threat of another government breakdown, and the crisis of high unemployment is only slowly receding. But in trying to address those problems by suppressing interest rates, the Fed risks unleashing speculation and inflation.

It is basically a matter of disposition: Is it better to risk doing too much or not enough?

Lacker, 57, often uses the word “humility” in describing his views. He means that the Fed should recognize that its power to stimulate the economy is limited, both for technical reasons and because it should not encroach on the domain of elected officials by picking winners and losers.

As he sees it, the Fed’s effort to reduce unemployment by purchasing mortgage-backed securities crossed both lines. He sees little evidence that it will help to create jobs. And he says that buying mortgage bonds is a form of fiscal policy, because it lowers interest rates for a particular kind of borrower.

But Lacker is at pains to emphasize that his disagreement with the 11 other members of the Federal Open Market Committee, who supported the purchases, is not about the need for help.

“It’s very unfair to think of me as not caring about the unemployed,” he said. “It just seems to me that there are real impediments, that just throwing money at the economy is unlikely to solve the problems that are keeping a 55-year-old furniture worker from finding a good competitive job.”

That sense of caution is deeply frustrating to proponents of the Fed’s recent efforts.

Economists Christina Romer and David Romer wrote in a recent paper published last month that such pessimism about the power of monetary policy is “the most dangerous idea in Federal Reserve history.”

“The view that hubris can cause central bankers to do great harm clearly has an important element of truth,” wrote the Romers, both professors at the University of California, Berkeley. “But the hundred years of Federal Reserve history show that humility can also cause large harms.”

It also makes an interesting contrast with Lacker’s personality. His favorite escape is driving a Porsche Boxster race car; a model sits on a shelf at his office. He jokes that the track is the only place that people don’t ask him about interest rates — although, he adds, they do care about fuel prices.

And at the Fed, an institution that likes consensus, dissenting also requires a certain amount of boldness. Lacker has said no at 13 of the 24 regular policy meetings he has attended as a voting member, one-third of all dissents since Ben S. Bernanke became the Fed’s chairman in 2006. He voted in 2006, 2009 and 2012 as part of the regular rotation of reserve bank presidents.

Given the consequences if he’s right, does he ever worry that he’s not shouting loudly enough?

“I haven’t been running around like my hair’s on fire,” he said. “And I think for me that reflects some humility. I’m not absolutely certain that the risks I worry about are going to show up. The majority of the committee, and the course they’re on, they could be right.”

“And,” he said, “I sincerely hope that they are right.”

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