NEW YORK – Supervision should be an alternative to monetary policy actions for dealing with asset bubbles and imbalances in the economy or financial system, Federal Reserve Bank of Boston President and Chief Executive Officer Eric S. Rosengren said today.
“If we take a good hard analytical look at the last recovery, we see that the low fed funds rate was not the standout, and standalone, culprit that many assume,” Rosengren told an audience in Philadelphia, according to prepared text of the speech, which was released by the Fed. “This is a crucial matter to consider right now, when rates are very low – in my opinion, totally appropriately – because some are predicting that these rates will fuel another bubble.”
Reform, he said, needs to determine who is responsible for regulating and supervising systemic risk and systemically important institutions. “In particular, reform should enhance the potential to wind down or resolve systemically important institutions that are failing,” he said. “This is critical to avoiding future crises.”
The Fed “should play a significant role in overseeing systemically important institutions and addressing systemic risks,” he said, “because of the substantial synergies between monetary policy, the lender-of-last-resort role, and supervision of banks.”
Supervisory policies must be connected to monetary policy and “monetary policy should not be conducted without the valuable insights gained from supervision of large and small banks.”
He continued, “Understanding the business cycle and its potential impact on the institutions under supervision should be integral to bank supervision and to understanding systemic risk. And supervisory powers provide an important alternative tool to traditional monetary policy as a way to address bubbles and insure the best possible economic outcome.”
Rescue operations are an “undesirable” role for the Fed, but the Fed’s efforts “reinforced the important role that the central bank can and should play in maintaining financial stability” since concerns about financial instability and “panics were key motivations for the founding of the Federal Reserve by Congress.”
While the economy is not pleasing anyone, had the Fed not stepped in “to help maintain financial stability” the recession would have been “much worse.”
Rosengren said the Fed needs to focus “on financial stability issues going forward. As a result, whatever actions are taken in Washington with regulatory reform, it is in everyone’s interest that any changes not impede the ability of the Federal Reserve to be a lender of last resort or to troubleshoot the functioning of financial markets during a crisis.”
