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Cutting 'patient' from Fed guidance should signal hike near: Lacker

Richmond Federal Reserve Bank President Jeff Lacker reacts during an interview with Reuters reporters in Washington January 12, 2015. REUTERS/Kevin Lamarque

By Michael Flaherty and Jason Lange

WASHINGTON (Reuters) - The Federal Reserve should stop talking about the need for a "patient" interest rate policy just before it thinks it will begin hiking rates, a top Fed policymaker said on Monday.

Richmond Federal Bank President Jeffrey Lacker said in an interview with Reuters that the Fed's guidance in December that it would be patient with raising rates harkened back to a strategy employed in 2004.

"I'd excise 'patient' if at a given meeting I felt we were likely to want to move at the following meeting," Lacker said.

In January of 2004, the Fed jettisoned its pledge to keep rates low for a "considerable period" and said it could be "patient" in removing stimulus, language it kept until May of that year when it dumped the reference to patience. At the next meeting in June, it raised rates.

In the interview, Lacker said he also believed that labor market slack was close to being eliminated, underscoring his view that the Fed should raise rates sooner rather than later to keep inflation under control.

Lacker, who gets a vote on the policy-setting Federal Open Market Committee this year, is an inflation hawk who has feared that too much government stimulus will fuel an increase in prices. He was the sole dissenter at all eight FOMC meetings during his last stint as a voting member on the committee in 2012, when the Fed was purchasing bonds in huge quantities.

"I've always been skeptical of the effect of our asset purchases on yields and economic growth. I think it could well be that the effect is negligible," Lacker said. "I think the issue for this year is rates and our interest rate policy and that's what I'm going to be focused on."

Fed Chair Janet Yellen has said she is worried about the amount of slack in the U.S. labor market, which is among the reasons why the central bank has kept up its accommodative monetary policy. Lacker refutes such a view.

"I think slack has come close to being eliminated. Maybe there's a little left relative to the natural rate, but I doubt it's large. So I think we should think about policy now in terms of what real interest rate the economy needs," he said.

Lacker said last week that there is no pre-set timetable for when the central bank will raise interest rates, a view he repeated on Monday, saying only a hike this year was "likely."

The Kentucky native has also been a vocal critic of government measures to bail out financial institutions. Lacker has said U.S. regulators must remove the implicit view from creditors that the government will step in to protect financial institutions, and to better adapt the bankruptcy code to handle large bank failures.

That puts him in opposition to a provision in the 2010 Dodd-Frank financial reform law that allows the Federal Deposit Insurance Corporation to assist with certain liquidations.

On Monday, Lacker was asked if repealing the provision would occur this year.

"This Congress is probably the one that would roll it back," he said.


(Reporting by Michael Flaherty and Jason Lange; Editing by Paul Simao)