The U.S. Treasury should take over the Federal Reserve's credit programs, with both agreeing to a "credit accord," Richmond Federal Reserve Bank President Jeffrey Lacker said.
Lacker, a voting member of the Federal Open Market Committee, said the Federal Reserve would be better able to focus on monetary policy and avoid political interference if the Treasury were to take over its emergency credit programs.
"The understanding could stipulate that the emergency lending is transferred to the books of the Treasury after a brief period of time has elapsed.
Moreover, the Treasury could be given explicit line of credit authority, as they now have for Fannie Mae, Freddie Mac and other entities," he said while speaking in Virginia on Monday.
Lacker noted that at some point in the future, the Fed will need to withdraw monetary stimulus to prevent a resurgence of inflation when the economy does begin to recover.
"That time could arrive before credit markets are deemed to be fully enough 'healed' to warrant winding down particular credit programs," he said. "If monetary policy and credit programs remain tied together, as they currently are, we risk having to terminate credit programs abruptly, or else compromise on our inflation objective.
He said separating credit programs from monetary policy would make it easier to come up with a successful "exit strategy."
On Friday, Philadelphia Fed President Charles Plosser made a similar suggestion, saying the Federal Reserve should swap its illiquid assets for Treasury securities in order to more easily raise interest rates when needed.
Plosser also said such a move would promote a clearer distinction between monetary and fiscal policy in order to ensure Federal Reserve independence.
By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009