While noting that risks remain, Federal Reserve Bank of Chicago president Charles L. Evans suggested monetary policy is where it should be. “As of today, I feel that the stance of monetary policy is consistent with achieving our dual mandate objectives and will help promote well-functioning financial markets,” Evans told the Futures Industry Association, according to prepared text of his speech released by the Fed yesterday. Risks to the upside and downside remain, he said. However, he noted that forecasts don’t always come true.“We can’t rule out the possibility of continued market difficulties. We can’t be sure how long it will take for financial intermediaries to complete the process of reevaluating the risks in their portfolios,” Evans said. “And many subprime adjustable-rate mortgages will see their rates climb over the next few months — a process that could feed back on to housing and financial markets. But developments could surprise us on the upside as well.”The subprime crisis is a liquidity problem, but market participants will learn from the mistakes made that caused the situation, he said. “Financial intermediaries are in the midst of reevaluating the risk associated with structured securities in their portfolios. And as we have certainly been seeing over the last several weeks, this is not easy to do and will take some time to complete,” Plosser said. “But I expect that this process will eventually reduce the lack of transparency that lies at the heart of the current liquidity crisis and will lead to more resilient financial markets going forward.”
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