(Adds more details from speech)
NEW YORK Feb 26 A financial conditions
framework would likely be useful when evaluating the economic
outlook and the conduct of monetary policy, New York Federal
Reserve Bank President William Dudley said on Friday.
In remarks to a panel at the University of Chicago Booth
School of Business, Dudley said that the level of the Fed's
benchmark federal funds rate impacts other financial market
variables, such as credit spreads and stock prices, and it is
these that influence the real economy.
"The level of the fed funds rate matters, but it also
matters how this gets transmitted to the real economy through
the financial sector," Dudley said.
Dudley pointed to the tech bubble in the 1990s and the
credit bubble that led to the most recent financial crisis as
examples of when the relationship between the fed funds rate
and financial conditions have diverged significantly.
"As a result, developments in the financial markets became
very important in the conduct of monetary policy," he said.
Dudley was discussing a paper by experts including former
Fed Governor Frederic Mishkin and the senior economists at
Goldman Sachs and Deutsche Bank, which put together a
"financial conditions index" incorporating more data affecting
firms outside the traditional banking system than existing
measurements of financial variables that influence the future
state of the economy.
The authors said they paid greater attention to the
issuance of asset backed securities, repurchase lending and
total financial market capitalization than traditional gauges
of financial conditions.
"Financial market developments matter greatly. The paper
successfully makes the case that it would be useful to have a
good set of summary statistics to serve as benchmarks to keep
track of such developments," Dudley said.
"It would also be useful to have a better understanding of
how shifts in financial conditions should be considered in the
ongoing conduct of monetary policy," Dudley said.
Dudley said financial conditions indicators could affect
how monetary policy is formulated. He noted that he has "always
been uncomfortable" with assumptions that the equilibrium real
fed funds rate is equal to 2 percent.
This assumption "ignores the possibility that the
equilibrium rate changes in response to technology shocks or in
response to changes in how monetary policy is transmitted via
the financial system to the real economy," Dudley said.
(Reporting by Kristina Cooke; Editing by Chizu Nomiyama