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Richmond Fed Chief Upset on MBS Policy Shift

Phil Hall
Sep 19, 2014

Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, has openly questioned a key aspect Wednesday’s decision by central bank’s Federal Open Market Committee (FOMC) regarding the long-anticipated policy shift away from tapering. "I cannot support the Committee’s planned approach to moving the Fed’s balance sheet toward its normal state,” Lacker wrote in a statement published today on the Richmond Fed’s Web site. “In particular, the statement says that the Committee currently does not anticipate selling agency mortgage-backed securities (MBS). I believe this approach unnecessarily prolongs our interference in the allocation of credit. 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. While this would favor home mortgage borrowers, it tilts the playing field against other borrowing by consumers.” Although Lacker has been among the most vocal critics of the central bank’s interventions in the mortgage finance market, he voiced his support over what he identified as “the planned approach to conducting interest rate policy when the time comes to raise rates” and the “principle that the Federal Reserve will, in due course, hold no more securities than necessary to implement monetary policy efficiently and effectively.” Nonetheless, he voiced his displeasure at the Fed’s plans relating to its MBS holdings and the manner in which it plans to carry out its new policy. “Interference in the allocation of credit by altering relative interest rates, and thus tilting the flow of credit toward some sectors and away from others, is an inappropriate use of the central bank’s balance sheet,” Lacker continued. “It is unnecessary to the conduct of monetary policy, the central bank’s primary responsibility, and involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not by an independent central bank. The Fed’s statutory mandate of price stability and maximum employment would be best served, I believe, by a well-articulated plan to actively reduce our holdings of MBS through sales at a steady, predictable pace." Phil Hall is managing editor of National Mortgage Professional Magazine. He may be reached by e-mail at
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