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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7518)	1/11/2007 7:36:27 PM
From: John Pitera	Respond to of 33421

Fed's Geithner-big dollar reserves may not be best Thursday, January 11, 2007 10:07:36 AM (GMT-06:00) Provided by: Reuters News (Adds comments) By Tamawa Kadoya NEW YORK, Jan 11 (Reuters) - A large accumulation of dollars in official reserves has helped keep U.S. interest rates low and pushed U.S. asset prices higher, but it could ultimately hurt long-term growth, New York Federal Reserve Bank President Timothy Geithner said on Thursday. "If they are large enough, they have the potential to alter or distort current decisions about investment and consumption in a way that could be detrimental to our longer-run growth prospects," he said in a speech at the Council on Foreign Relations, adding: "And they are important because they work to mask or dampen the effects on risk premiums in financial markets that we might otherwise expect to be associated with the expected trajectory of the fiscal and external imbalances in the United States." The People's Bank of China, the largest holder of foreign reserves, does not disclose the breakdown of its holdings, but most analysts believe 70 percent are held in dollars because China maintains a tight rein on how its yuan currency trades against the U.S. currency. China's official reserves are likely around $1 trillion, and some analysts predict they will rise to $2 trillion by the end of 2010. Asked in a question after his speech on the dollar's role as the most widely held reserve currency, Geithner said the Fed and the U.S. government need to do their best to preserve confidence in U.S. capital markets and fiscal policy. "We will provide that broader economic policy framework that's going to make this a place where you are going to see innovation and future productivity enhancements," he said. Fed officials rarely comment directly on exchange rates. PRODUCTIVITY GROWTH INTACT Geithner, who is a voting member of the policy-setting Federal Open Market Committee (FOMC), did not comment on the short-term U.S. monetary policy outlook in his remarks. Long-term interest rates remained relatively low, assets prices were higher and <b.credit spreads were low, but such conditions were not fully understood and it was not clear how durable they would prove to be, he said. Still, the acceleration of U.S. productivity in the latter half of the last decade was likely to remain intact, and productivity growth was accelerating outside the United States, particularly in some large emerging economies, he said. An increase in monetary policy credibility has led to lower inflation and more stable inflation expectations, boosting growth and fostering benign market conditions, he said. "Better monetary policy has lowered expectations of future inflation and inflation volatility and has contributed to lower risk premiums in general." Asked about how the FOMC would consider inflation targeting and how to reconcile that with the Fed's mandate of seeking both price stability and full employment, Geithner said the rate-setting committee was in the process of examining how the basic framework of monetary policy might evolve in the future. He added that he saw no conflict between an inflation target and the dual mandate Congress has given the Fed. "The (Fed) chairman's been very clear in his confirmation hearings and since that we wouldn't consider changes that would call into question the need for changes to that broad legislative dual mandate," he said. The FOMC is expected to debate inflation targeting and other ways to improve the policy transparency at its meeting on Jan. 30-31. But no specific measures are expected to emerge in the near term. Geithner also said monetary policy alone was not enough to ensure an environment for long-term growth, and restoring confidence in U.S. fiscal management would be important, especially given the size of the U.S. external imbalance, now at some 7 percent of gross domestic product. Fiscal sustainability would also help adjustments of global imbalances to unfold with less risk, he said.