Even as the Federal Reserve moves to stem the recent turmoil in the financial markets, Federal Reserve Bank of Philadelphia president Charles I. Plosser warned not to expect the Fed to do things it can’t.
“I think it is particularly important, for example, to recognize that monetary policy cannot solve all the problems the economy and financial system now face,” Plosser said in prepared text of a speech delivered Friday at the Global Interdependence Center’s annual monetary and trade conference. “It cannot solve the bad debt problems in the mortgage market. It cannot re-price the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies because some of their assets are now worth much less than previously thought. The markets will have to solve these problems, as indeed they will. But it will take some time.”