CAMBRIDGE, Massachusetts (Reuters) - The Federal Reserve will act to protect the wider economy from financial turmoil but not to shelter individual investors from losses, Fed Board Governor Frederic Mishkin said on Thursday.
By Scott Malone
CAMBRIDGE, Massachusetts (Reuters) - The Federal Reserve will act to protect the wider economy from financial turmoil but not to shelter individual investors from losses, Fed Board Governor Frederic Mishkin said on Thursday.
"The fact that people lose money is just fine with me as long as I do my job of keeping the economy on an even keel," Mishkin said after a speech at the Massachusetts Institute of Technology outside Boston.
"People are supposed to lose money when they do stupid things. We actually still need to respond if there is an effect on the credit markets, because aggregate demand is going to go down," he said in response to a question.
!ADVERTISEMENT!The U.S. central bank has lowered interest rates by 75 basis points since mid-September to 4.5 percent and investors expect them to cut by at least another quarter point at their next meeting, on December 11, amid renewed market tension.
Mishkin said in his speech that the decision would be driven by what happens in the economy over the next two weeks.
"The near-term path of interest rates is highly uncertain and depends on the implications of the incoming data, which in some cases are evolving right up to the time of the (Fed's interest rate-setting) meeting," Mishkin said.
Critics complain the Fed's rate cuts since credit markets nearly seized up in August has just bailed out rich investors, while leaving ordinary people to pay the price through higher inflation down the line. Mishkin said this was short-sighted.
"People say you should not respond at all (to market losses). Guys who've made a mistake -- kill them. But if I am killing the economy at the same time, clearly I have actually done a very bad job in terms of fulfilling the mandate."
The Fed by law must pursue both low and stable inflation and the maximum level of sustainable growth and employment.
Global financial market turmoil sparked by the collapse of the U.S. subprime market has challenged policymakers to cushion growth at a time when rising energy and food prices could pressure inflation.
Fed forecasts for growth and inflation through 2010 announced last week demonstrate that policy-makers would not try to abruptly lower inflation to the rate they consider optimal, Mishkin said.
"The recent high level of overall inflation reflects rapidly rising energy prices that the Federal Reserve obviously cannot control," he said. "Any attempt to bring overall inflation down too quickly would entail large losses of output and employment," he added.
(Writing by Mark Felsenthal and Alister Bull; Editing by Diane Craft)
