WASHINGTON (Reuters) - The Federal Reserve would not hesitate to act to prevent financial strains from damaging the economy and any steps it does take are not made to shield investors, a top Fed official said on Friday.
WASHINGTON (Reuters) - The Federal Reserve would not hesitate to act to prevent financial strains from damaging the economy and any steps it does take are not made to shield investors, a top Fed official said on Friday.
"The Fed does not have the desire or tools to prevent widespread losses in a particular sector but should not sit by while a financial upset becomes a financial calamity affecting the entire economy," St. Louis Federal Reserve Bank President William Poole said at a conference sponsored by the Cato Institute.
"Whether further cuts in the fed funds rate will alleviate financial market turmoil, or risk adding to it, is always an appropriate topic for the (Fed's policy-setting Federal Open Market Committee) to discuss," he said.
!ADVERTISEMENT!Poole's comments appeared broadly in sync with comments made earlier in the week by Fed Chairman Ben Bernanke and Fed Vice Chairman Donald Kohn, who indicated openness to further rate cuts.
Poole, who is among the officials who will vote on interest rates at the FOMC's next meeting on December 11, said he would not let concerns about "moral hazard" prevent him from backing further cuts in benchmark Fed interest rates.
Moral hazard is a concept that markets might take greater risks on the belief that government policy would protect them from suffering losses.
"I would not want people in the markets to believe that I, at any rate, would be so concerned about the moral hazard argument that I wouldn't possibly advocate a 25 basis point or a 50 basis point cut, or whatever might be on the table," Poole told reporters after his speech.
DIVERSE VIEWS AT FED
Financial markets widely expect the Fed to cut rates at its December meeting to protect the economy from renewed credit market turbulence.
Bernanke and Kohn signaled earlier this week they would be open to lowering interest rates again in response to deteriorating credit markets that have been unnerved by billions of dollars of write-downs at large U.S. banks due to exposure to subprime mortgages and other debt.
The U.S. central bank cut rates by a cumulative three-quarter percentage point to 4.5 percent in September and October to buffer the economy from market turmoil and the slumping housing market.
Meanwhile, in an indication there will be debate over the interest rate decision next month, Philadelphia Fed President Charles Plosser said on Friday that while financial market turmoil increased uncertainty, spillover to the broader economy so far had been limited.
In his speech in Washington, Poole said the Fed is careful not to take actions just to shield investors or businesses from losses, but it does strive to ensure economic and price stability.
From time to time the Fed will act to stabilize the economy to cushion it from recession or forestall a crisis in the financial system, Poole said.
"Provided that the central bank does not sacrifice long-term price stability, it can and should respond to new information indicating an increased risk of recession," he said.
Likewise, it is a mistake to believe the Fed aims to support a rising stock market with its actions, although it would not refrain from acting if policy adjustments had the effect of boosting stocks, Poole said.
"It is a fundamental misreading of monetary policy to believe that the stock market per se is an objective of policy," he said, disabusing the notion of a "Fed put" that protects investors.
"It is also a mistake to believe that a policy action that is desirable to help stabilize the economy should not be taken because it will also tend to increase stock prices."
(Reporting by Mark Felsenthal; editing by Leslie Adler)
