Fed's Lacker says QE2 is risky and could cause rapid balance sheet reduction

Richmond Fed President Jeffrey Lacker, in a speech yesterday admitted that central bank policy was "risky", and that they should not be setting monetary policy based upon unemployment rate. 
Lacker, one of the central bank's vocal hawks, and also a voting member, said the decision to increase monetary stimulus was based primarily on weakness in the labor market and set a precedent he said threatens future inflation.  Via ABC News:
“Further balance-sheet expansion now could require more rapid balance-sheet reduction later on,” Lacker said in a speech to the Charlotte Chamber of Commerce.

"The provision of further monetary stimulus at this point in the business cycle is not without risks," Lacker told a conference sponsored by the Charlotte Chamber of Commerce in North Carolina.

"Historical experience, including the inception of the Great Inflation of the 1970s, suggests central banks should be careful not to steer monetary policy off course by targeting the unemployment rate," he said.


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