The Federal Reserve’s Federal Open Market Committee (FOMC) voted in favor Wednesday to reduce its monthly bond-buying program by another $10 billion, keep its interest rates to near zero and continue to reinvest the returns from maturing bonds as the balance sheet reaches to an enormous sum of $4.5 trillion.
Moving forward, the Fed will implement its “Policy Normalization Principles and Plans” strategy.
The central bank’s decision came with quite a bit of dissent from a number of Fed members.
Earlier this week, Dallas Fed Bank President Richard Fisher published an op-ed piece in the Wall Street Journal in which he outlined his dissatisfaction with the central bank’s ultra-easy monetary policy. Furthermore, Philadelphia Fed Bank President Charles Plosser was one of two “no” votes on the policy measure, arguing that the central bank is not taking into account progress in the overall economy.
Richmond Fed Bank President Jeffrey Lacker released a statement Friday in which he dismissed the Fed’s exit strategy initiative because of his initial frustration over its mortgage-backed securities (MBS) acquisitions. Lacker, who has been one of the most outspoken critics of the Bernanke and Yellen administrations, has opposed MBS purchases because he believes it singles out a certain sector and provides it with an advantage.
“Specifically, I did not support plans for the assets on the Fed’s balance sheet,” said Lacker in his statement. “I believe this approach unnecessarily prolongs our interference in the allocation of credit. While this would favor home mortgage borrowers, it tilts the playing field against other borrowing by consumers.”
The Federal Reserve official said that the Fed’s mandate of price stability and heightened employment would be better served if there would be a well thought out initiative that would lead to reducing its holdings of MBS through sales consisting of a balanced and expected pace.
At the present time, the Fed maintains approximately $1.7 trillion in MBS and $40 billion in federal agency debt.
“The Fed’s MBS holdings may put downward pressure on mortgage rates, compared to holding an equivalent amount of Treasury securities, but if so, then other borrowers would likely face higher interest rates,” Lacker averred Friday “While this would favor home mortgage borrowers, it tilts the playing field against other borrowing by consumers.”
Lacker made similar remarks late last year when the Fed persisted in buying MBS: “If asset purchases are appropriate, the FOMC should confine its purchases to U.S. Treasury securities.”
Since the financial crisis, Lacker has been vehemently against credit allocation because he feared that it would lead to constant requests for loans. He stated in a Nov. 2011 speech that the Fed’s intervention in credit markets would incite “an inevitable tension.” In the end, the politicizing process would then produce risks for monetary policy independence, something that the Fed has maintained since its establishment.
Meanwhile, the Fed has not signaled that it would start to raise interest rates. Fed Chair Janet Yellen told reporters at a news conference Wednesday that unemployment remains high and the labor market is still not strong enough to warrant a hike in rates.
Despite Yellen’s hesitation to increase rates, a number of Fed officials still foresee a rate hike next year.
