–Financial Stability Pol,Monetary Pol Share Equal Status Due to Crisis

by Brai Odion-Esene

BOSTON (MNI) – Federal Reserve Chairman Ben Bernanke said Tuesday
while the central bank has had to utilize unconventional policy tools —
with interest rates close to zero — to support the economy, its use of
forward guidance and other methods to communicate the future path of
monetary policy will increase even when conditions return to normal.

In addition, the financial crisis of 2008 to 2009 made it clear the
responsibility of central banks to protect financial stability “is at
least as important as the responsibility to use monetary policy
effectively in the pursuit of macroeconomic objectives,” Bernanke said
in remarks prepared for deliver to an economic conference hosted by the
Boston Fed.

Bernanke said forward guidance about the future path of policy
rates took on greater importance as the Fed’s policymaking Federal Open
Market Committee cut policy rates close to zero.

Following the FOMC’s announcement after its August meeting that it
would keep rates low at least through mid-2013, Bernanke said the
committee “continues to explore ways to further increase transparency
about its forecasts and policy plans.”

“Forward guidance and other forms of communication about policy can
be valuable even when the zero lower bound is not relevant, and I expect
to see increasing use of such tools in the future,” Bernanke said.

As for the Fed’s expansion of its balance sheet, an additional
effort to keep rates low, Bernanke said that in more normal times —
“when short-term policy rates are not constrained” — he expects balance
sheet policies will be used rarely.

The financial stability was often viewed as a “junior partner” to
monetary policy, Bernanke said, but “One of the most important legacies
of the crisis will be the restoration of financial stability policy to
co-equal status with monetary policy.”

He noted that threats to financial stability, and the potential
ramifications for the economy, are “throughly discussed” at FOMC
meetings.

“Recent events have shown the importance of anticipating and
defusing threats to financial stability before they can inflict damage
on the financial system and the economy,” Bernanke said.

He added that while the first line of defense against the threat of
financial instability should be financial regulation and supervision —
along with monitoring the financial system, the effectiveness of such
targeted policies is not yet proven.

“So the possibility that monetary policy could be used directly to
support financial stability goals, at least on margin, should not be
ruled out,” Bernanke said.

Another lesson from the financial crisis, Bernanke said, is that
the use of a flexible inflation targeting framework had helped produce a
long period of macroeconomic stability, “it ultimately, by itself, was
not enough to ensure financial stability.”

** Market News International **

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