Fed officials put financial stability concerns on front burner

BOSTON/SAN FRANCISCO Thu Jun 5, 2014 3:25pm EDT

1 of 3. Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, speaks at the ninth annual Carroll School of Management Finance Conference at Boston College in Chestnut Hill, Massachusetts June 5, 2014.

Credit: Reuters/Brian Snyder

BOSTON/SAN FRANCISCO (Reuters) - A pair of Federal Reserve officials on Wednesday warned that raising U.S. interest rates to fend off bubbles and other troubling signs of financial market unrest could undercut the Fed's efforts to put the U.S. economy on a sounder footing.

But they embraced broadly different approaches to address the possibility that, as policymakers from Fed Chair Janet Yellen on down have said, extremely loose monetary policy may be encouraging businesses and households to take risks that set the financial system up for another crash.

San Francisco Fed President John Williams touted alternative ways to use monetary policy to shore up the financial system's ability to withstand shocks.

These included so-called nominal income targeting aimed at keeping incomes growing steadily so families will be in a better position to avoid bankruptcy or foreclosure.

To Williams, such alternative approaches can boost stability without derailing the Fed from its main goals of low inflation and high employment. Minneapolis Fed President Narayana Kocherlakota, for his part, counseled a measure of tolerance for increasing financial stability risks, painting those risks as an unwanted, but unavoidable, side effect of the low rates the economy will need for years to claw its way back to normal.

"For a considerable period of time, the (Fed) may only be able to achieve its macroeconomic objectives in association with signs of instability in financial markets," he said, advocating low real interest rates for another five years, far longer than most of his colleagues.

The speeches, for all their differences, highlight the degree to which concerns about the financial system's vulnerability to shocks has penetrated the deliberations and mindset of Fed officials.

Prior to the crisis, they rarely included financial stability concerns in their calculus for monetary policy.

The recent departure from the Fed Board of Jeremy Stein, who had become the Fed's most vocal advocate of using tighter monetary policy to reduce risks to financial stability, had raised concern among some observers that the Fed would lose its focus on incorporating financial stability concerns into monetary policy making.

(Writing by Ann Saphir; Editing by Chizu Nomiyama)

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Comments (2)
nose2066 wrote:
The Fed keeps talking about changing their objectives – now it’s about raising incomes. But it’s their tools that are flawed. The money is going to the wrong places. The rich keep getting richer. The imports from China and other countries keep taking more jobs away. And the money is not going to create more jobs in America.

No amount of talking about their objectives is going to improve the Federal Reserve’s flawed monetary tools.

Jun 05, 2014 8:16pm EDT  --  Report as abuse
Gorm wrote:
Congress burdened the Fed with the additional responsibility of full employment, a MAJOR mistake, given our dysfunctional leadership where the Fed is actually trying to neutralize some of our leadership mistakes, mismanagement.
These QEs and low rates have benefited a FEW at the expense of the many. QEs have inflated assets, which was almost a secondary, backdoor Fed approach to inflating assets with the expectation their NEW wealth would increase spending, jobs, economic expansion. FACT is business is NOT EXPANDING, NOT INVESTING. It is merely doing more with less, thereby hyping earnings, and benefiting via options, etc the wealth of corporate leadership.
Low interest rates benefit the VERY FEW, ie our Treasury, Financials and those who employ leverage. Stock margins are at a very high rate today.
Credit card outstandings increased in April but certainly NOT at any discount rate. Captive auto financing suffers from a high percentage of subprime financing. Just read where credit unions were being cautioned to avoid “risky” lending practices.

Banks are cutting back staff, primarily in the mortgage areas, mainly because that segment is SLOWING, even as record low rates persist.

Our KEY problem is low disposable income. Adjusted for inflation, US Household income has fallen every year since its peak in 1995. Much of labor has been replaced via automation, technology and outsourcing. Many good paying manufacturing jobs will NOT return.

Fast food eateries are now employing more self serve technology to reduce labor expense, ie Applebee, McDonald, particularly as threatened with higher minimum wage scales.

Keep in mind that business leaders are incentivized to hype EPS, ROA and ROI not provide jobs. Consequently, labor is unreliable and costly. Business looks to eliminate COST, increase earnings, and share price.

Until disposable income increases and debt subsides we are not going to see any economic surges. Just look at Japan, Europe and China. EVERY major economy is suffering from and fighting off contraction, fears of deflation.

DEBT by its very definition is deflationary as it represents PAST production and consumption. America needs to get its balance sheet and income statement rectified before we are going anywhere!!

Jun 07, 2014 11:04am EDT  --  Report as abuse
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