UPDATE 1-Central banks need clear policy rules-Fed's Poole

Mon Apr 2, 2007 1:19pm EDT

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(Adds more Poole remarks, background on most recent FOMC decision)

NEW YORK, April 2 (Reuters) - Federal Reserve Bank of St. Louis President William Poole said on Monday that a clear monetary policy rule provides a central bank with a powerful tool in its quest for sustainable growth and low unemployment.

"Focus on monetary policy regimes and policy rules as the instrument of policy, not the near-term choice of the federal funds rate target," he said in prepared remarks to the New York chapter of the National Association for Business Economics.

"If the (Federal Open Market) Committee communicates its objectives and strategy in a transparent and credible fashion, the bond market and other forward-looking financial markets will amplify the Committee's near-term decisions and thereby do a good deal of its work for it," he said.

Poole, a voter this year on the Fed's interest rate-setting committee, is a long-time advocate of inflation targeting but made no direct mention of this in his prepared remarks. The Fed is currently pondering whether it should adopt a target, as part of a wider assessment of its communication strategy.

The Fed left interest rates unchanged at 5.25 percent at its last meeting. But it removed from its policy statement an explicit reference to additional policy firming, thereby creating flexibility for a rate cut if U.S. growth weakened unexpectedly.

However, the Fed also left its anti-inflation bias intact by stressing that inflation remained its predominant concern -- a sign that borrowing costs were not heading down soon.

Poole said the economy was on a solid footing and the recently seen weakness in fourth quarter economic growth reflected a change in the level of inventories held by businesses. He also employed a fairly relaxed tone in his characterization of inflation.

"Our economy is sound. The GDP (gross domestic product) gap is small; economic activity is growing at approximately the same rate as potential despite the housing slowdown; and, inflation is retreating as energy prices stabilize," he said.

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