Time to Plot Fed's Exit Strategy Getting Closer: Lacker

The Federal Reserve needs to start winding down its monetary easing programs before inflation becomes a serious problem, Richmond Fed President Jeffrey Lacker told CNBC Friday.

Jeffrey Lacker
Jeffrey Lacker

With the central bank about halfway through the second, $600 billion phase of its Treasury-buying strategy—often referred to as quantitative easing—the economy is showing its most serious signs yet that prices are on the rise.

Lacker said central bankers need to get ahead of the trend and start re-examining its programs now while the economy is in its initial recovery phase.

"Recovery has been well established, growth is going to pick up," he said. "At this point in the business cycle we need to withdraw monetary policy stimulus at some point in order to prevent inflation from rising, and it's often at this stage that inflation picks up."

As for the Fed's exit strategy, Lacker said he would prefer the central bank start selling the securities it has bought before raising rates. That would give policy makers a better feel for how the economy will react once the Fed starts unwinding its $2.6 trillion balance sheet.

The Fed's policies have been aimed in part at creating what it considers a healthy level of inflation—a rise of between 1 and 2 percent that would indicate the economy is accelerating but at a manageable level.

However, several metrics lately have shown inflation signs—a rise in non-core prices that include food and energy, a surge in oil prices and indications from manufacturers that their prices paid and received are rising.

Speaking specifically on the oil prices, Lacker said he doesn't think the rise of crude to near $100 a barrel and prices at the pump now well over $3 a gallon will derail the recovery.

"So far this seems quite manageable. The real danger is in inflation psychology," he said. "I think as long as expectations are managed well we're going to get through this without a burst in inflation."