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Cleveland Fed President Loretta Mester said
these direct "macroprudential" tools should be the central
bank's first line of defense against financial excesses that
threaten the economy, and that monetary policy should be used
only if they fail and risks are growing.
With the comments, Mester, the Fed's newest policymaker, waded
into the debate over whether the central bank should proactively
prick bubbles in areas such as mortgage markets or leveraged
loans, or whether it should only adjust rates based on its
formal inflation and employment goals.
"I would opt to use the macroprudential tools as the first line
of defense, since they can be more targeted to the markets and
institutions where the risks are emerging," she told a financial
stability conference. "Whether monetary policy would be as
effective is debatable. While interest rates affect the
fundamental value of assets, it is not clear they affect the
speculative or bubble portion."
Since the Fed was caught flat-footed in the financial crisis,
policymakers have paid more attention to signs that asset prices
are threatening the broader economy, which has been slowly
recovering from recession.
Mester, who has a vote on policy this year under the Fed's
rotating system, said the Fed must assess growing risks to
stability, not whether there is a bubble.
"In a situation in which the macroprudential tools proved to be
inadequate and risks to financial stability continued to grow,
monetary policy should be on the table as a possible defense,"
she added.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)
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