–Retransmitting Story Sent 11:57 ET; Correct’Stagflatn’ To ‘Stagnation’

By Vicki Schmelzer

NEW YORK (MNI) – Bank of England Monetary Policy Committee member
Adam Posen said Monday he was more concerned about “stagnation” than
inflation or deflation.

Central banks have to avoid a deflationary state, he said during a
panel discussion at the Council on Foreign Relations in New York City.

At the same time, Posen warned against “irresponsible monetary
tightening.”

Posen noted, however, that there is “nothing to suggest that
central banks are unwilling to tighten.”

In other monetary policy comments, Posen did not believe that
“central banks are out of control,” in terms of the use of overly loose
monetary policy and the use of non-standard measures and disagreed about
the “cost” of quantitative easing.

His take was that the move from standard monetary policy to
quantitative easing “was not that big of a shift.”

A good central bank “should provide background music for everyone
to listen to,” rather than be the center of market attention, Posen
argued.

In recent discussions with fund managers, Posen discerned that
“real money is pricing in low interest rates” and are not necessarily
sidelined because of erratic market conditions.

Also, “real money is not betting on inflation,” he said.

Overall, current and former central bankers offered contrasting
opinions about the limits of central bank monetary policy Monday.

Peter Fisher, senior managing director and head of fixed income at
BlackRock Inc, served as moderator at the panel discussion, which also
featured former Central Bank of Brazil Governor Arminio Fraga, former
Federal Reserve Governor Kevin Warsh, in addition to Posen.

In a session called “Central Banking in an Age of Improvisation,”
panelists were asked about their fears about inflation versus deflation
(in next three to five years) as well as central bank effectiveness.

Fraga, (currently chairman of the Board, BM&F Bovespa) who had more
concern about inflation overall, noted that central banks “tended to
improvise” when they faced a “limit situation,” i.e. when liquidity
begins to dry up.

“Central banks have always improvised,” he said, pointing to the
use of such tools at capital controls.

If given a choice, Fraga would prefer a more “simple economic
regime,” where a central bank need only be concerned about watching
inflation and the fiscal situation – where there would be no need for
improvisation.

Warsh, distinguished Visiting Fellow at the Hoover Institution,
stressed the need for a “dashboard” that was not simply driven by
“models, the market, and M1 and M4.”

His fear is that looking back in 50 years the market will look at
central bank mishaps the same way the market does now at 1930s monetary
policy decisions.

When interest rates are at or near zero it is more difficult for
central banks to weigh the “risk/reward” of additional monetary policy
easing or the use of non-standard tools, Warsh said.

While “central banks have to be aggressive” in making sure there is
liquidity in the market, too much action may cause dependency, he said.

Global investors and governments may start to expect central banks
to always keep pulling “rabbits out of the hat” to address stress in the
market, Warsh said.

“It’s a bad habit” to continue to expect more, and governments need
to address their own issues (fiscal prudence).”

“We are not the repair shop for broken fiscal policy,” Warsh added.

Fraga also bemoaned “the lack of work done on long term (fiscal)
issues.”

He pointed to OECD data on debt held by households, non-financial
institutions and governments that states that overall debt has doubled
in the past 30 years.

“We got drunk; now we are having a hangover.”

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: M$$FX$,M$U$$$,M$$BE$,M$X$$$]