Fed has done what it can, says US central banker
He warns of a painful process of readjustment ahead
(WASHINGTON) The US central bank has done what it can to buffer the economy through a downturn, and a painful process of readjustment is likely ahead, Kansas City Federal Reserve president Thomas Hoenig said on Monday.
Mr Hoenig: Sharp consumption reversal a major part of slowdown
‘The Fed has done about as much as it can do,’ he said in an interview on PBS’s Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the programme.
‘We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively,’ he added.
Mr Hoenig said that he was surprised at how quickly economic activity has slowed, but that a sharp reversal of consumption was clearly a key development.
‘The consumer factor was a major part of the strong slowdown and the actual entering into the recession,’ he said.
The Fed has this year cut interest rates to one per cent from 4.25 per cent, offered hundreds of billions of dollars in loans to financial institutions and helped bail out major firms as part of extraordinary efforts to cushion the economy.
Mr Hoenig, who is not a voting member of the Fed’s interest rate-setting committee this year or next, said that there are likely tough times ahead as financial institutions and households pare debt.
‘Part of it is working through the deleveraging,’ he said.
‘I don’t know of any painless way to rebalance your economy, you have to go through this adjustment, and we will get through it, but it’s not going to be without consequence,’ he added.
He told a banking audience earlier in the day that authorities should find ways beyond monetary policy to resolve future financial crises.
‘Going forward, it will be essential that our financial system have a wider range of policy and market-based options to resolve crises, with less reliance being placed on monetary policy,’ he said in remarks to a private Institute of International Bankers conference on financial regulation in New York.
Mr Hoenig said that ‘an enormous burden’ has been placed on monetary policy to resolve the crisis.
‘Monetary policy is not designed to address many of the underlying factors, particularly when the problems extend beyond liquidity and raise issues of solvency and informational shortcomings,’ he said.
Mr Hoenig said that policy-makers must set clearer rules for financial institutions, and establish a better crisis management framework. Authorities must also consider how to take away the temporary assistance programmes that they have established, he said. — Reuters
Source : Business Times - 19 Nov 2008
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