WASHINGTON — Federal Reserve Board governor Kevin Warsh yesterday said using the “hammer” of federal funds easing is an imperfect way to counter market liquidity problems, even if the U.S. economy should weaken further, and said inflation concerns cannot be ignored.
“Now, policymakers may be well served encouraging a new financial architecture to emerge, aided in part by the actions we have taken,” Warsh said in remarks prepared for the Exchequer Club here.
He said humility is a “particularly important attribute for a central banker, particularly when financial markets and financial intermediaries — through which the effects of monetary policy flow to the real economy — find themselves at a crossroads.”
He said central bankers in general should be “mindful of the dangers of purporting to know more than we do about the relationship between central bank policies and the real economy.”
In the present circumstance, Warsh said that means, “Even if the economy were to weaken somewhat, we should be inclined to resist expected, reflexive calls to trot out the hammer again” in the form of federal fund rate cuts.
Instead, he continued, the further hammering that needs to be done “needs to be accomplished by the financial institutions themselves in retooling their businesses and rebuilding the credit channel to help ensure a stronger, more durable economy.”
Private institutions should raise “substantial capital, reconstitute business models, and take other actions to reinvigorate the principal transmission channel of monetary policy,” Warsh said.
The private efforts “are critical to improving market functioning, and until this process is more advanced, the economy is unlikely, in my view, to return to sustainable trend-rate growth,” he said
—Market News International
