Fed cannot allow temporary inflation spike: Lacker (by Greg Robb)

WASHINGTON (MarketWatch) - The Federal Reserve will lose credibility "for decades to come" if it allows inflation to rise temporarily in order to help stimulate the economy, said Jeffrey Lacker, the president of the Richmond Federal Reserve Bank, on Tuesday. In its policy statement in September, the Fed said it would keep rates close to zero even after the recovery picks up. In a speech to the Shadow Open Market Committee meeting in New York, Lacker said it is not clear that this mechanism can work without raising expected inflation. Adopting this strategy without compromising credibility may work in classroom models but not in actual practice, he said. Lacker has dissented from all seven Fed policy statements this year. He has opposed the Fed's third round of asset purchases and has argued against setting a calendar date for the first rate hike. Lacker said he did favor replacing the calendar date with economic thresholds, as long as they were not precise and maintained stable inflation expectations. Lacker suggested that legislation may be the best way to limit the Fed's ability to purchase agency mortgage-backed securities.