Recalling that at its last meeting the Federal Open Market Committee said uncertainties surrounding the economic future are unusually high, Federal Reserve Board vice chairman Donald Kohn said the central bank needs to be “nimble” in its policymaking. “My discussion today was intended to highlight some of the issues we will be looking at in financial markets as we weigh the necessity of future actions,” Kohn said yesterday, according to prepared text of his speech released by the Fed. “We will need to assess the implications of these developments, along with the vast array of incoming information on economic activity and prices, for the future path of the U.S. economy. As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now. In my view, these uncertainties require flexible and pragmatic policymaking — nimble is the adjective I used a few weeks ago.”Dropping the discount rate and allowing term loans from the discount window was not as effective as it could have been because banks view borrowing as a sign of a troubled institution, he said. “The success of such a program lies not in loans extended but rather in the extent to which the existence of this facility helps reassure market participants,” according to the speech’s text. “In that regard, I think we had some success, at least for a time. But the usefulness of the discount window as a source of liquidity has been limited in part by banks’ fears that their borrowing might be mistaken for accessing emergency loans for troubled institutions. This 'stigma’ problem is not peculiar to the United States, and central banks, including the Federal Reserve, need to give some thought to how all their liquidity facilities can remain effective when financial markets are under stress.”
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