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Lacker says latest stimulus test limits of Fed's credibility

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during the Charlotte Chamber's Economic Outlook Conference in Char
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during the Charlotte Chamber's Economic Outlook Conference in Char

By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - The U.S. Federal Reserve's latest bond-buying stimulus plan threatens the central bank's credibility and raises the risk of future inflation, Richmond Fed Bank President Jeffrey Lacker said on Friday.

Lacker, a vocal inflation hawk who dissented at every Fed policy meeting last year, held his ground on opposing the decision to purchase $85 billion per month in mortgage and Treasury bonds until the employment outlook improves.

While he believes the pace of growth will remain tepid this year, around 2 percent, Lacker has repeatedly argued monetary policy is not the appropriate way to tackle the problem.

"It is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis," he told a meeting of the Maryland Bankers Association.

"I see an increased risk, given the course the committee has set, that inflation pressures emerge and are not thwarted in a timely way."

STAYING ALERT

Lacker's comments come just a day after the release of minutes from the Fed's December meeting caught investors by surprise because of widening concern about the potential negative side effects of unconventional monetary policy.

The report showed several members of the Federal Open Market Committee foresaw a chance that asset purchases would need to be slowed or halted altogether before the end of 2013.

That appeared to conflict with hints that the open-ended program might remain in place even if output growth picks up steam in coming years. But it was certainly in line with Lacker's message.

"I intend to remain alert for signs that our monetary policy needs adjustment," said Lacker.

U.S. employment data on Friday showed the economy added 155,000 jobs last month, in line with forecasts but still too modest to bring down the jobless rate, which stands at 7.8 percent.

The Fed said in December it would keep interest rates near zero until unemployment gets down to 6.5 percent, as long as inflation projections remain shy of 2.5 percent. The central bank's official inflation target, adopted last year, is 2 percent.

(Reporting By Pedro da Costa; Editing by Neil Stempleman)

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