St Louis Fed's Poole says Fed can wait out current market upsets
Tue, Jul 31 2007, 17:49 GMT
afxnews.com
WASHINGTON (Thomson Financial) - There is no urgency for the Fed to act now because of upsets in the financial markets, St Louis Federal Reserve Bank president William Poole said today.
The Fed will not "ignore what happened last week," he said, "but it is important that the Fed not permit uncertainty over policy to add to the existing uncertainty."
Neither the Fed nor investors know the full implications of the stock market declines and risk repricing that began last week, he said in remarks prepared for an economic policy conference at the University of Missouri.
Poole believes "the market understands that the Fed will act in due time if and when evidence accumulates that action would be appropriate."
And the Fed should act only if it is clear that financial upsets threaten the economy or the markets themselves.
As long as inflation expectations are "well anchored" as they are now, he argued, "the central bank can hold its policy rate relatively steady and rely on market adjustments in long rates to do much of the stabilization work. When new information arrives, most of the time the central bank can wait for market responses and the passage of time to clarify what is happening. The current situation is a perfect illustration."
The occasion for Poole's speech was a kind of memorial lunch on the birthday of the late Milton Friedman, founder of monetarist economics.
Friedman contended that steady growth of a nation's money supply was the best policy for containing inflation and promoting growth. He did not think either central bankers or politicians could be trusted to maintain a stable economic policy.
"With evidence from the Greenspan era," said Poole, "Milton changed his view a bit, but was not convinced that Greenspans success in adjusting the stance of monetary policy was likely to be replicated by future Fed chairmen."
Few economists today still support targeting money supply growth, although the European Central Bank considers it more important than the Fed does.
Friedman "lost a battle but truly did win the war," according to Poole. "He did prevail in his insistence that policy be apolitical and rely to the maximum possible extent on market judgments."
dennis.moore@thomson.com |
