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Bernanke says policy predictability crucial

ST LOUIS (Reuters) - Federal Reserve Chairman Ben Bernanke said on Friday that being predictable was the cornerstone of running a successful central bank policy.

Treasury Secretary Henry Paulson sits alongside Federal Reserve Chairman Ben Bernanke during a meeting of G7 finance ministers and central bank governors at the Treasury Department in Washington, October 19, 2007. REUTERS/Jason Reed

“Predictability is critical in building credibility. It is critical in reducing uncertainty, in making long term interest rates respond in appropriate directions to Fed actions,” he told a conference in St Louis by satellite link, during a panel discussion on making monetary policy under uncertainty.

The Federal Reserve is reviewing its communication strategy, including whether to adopt an explicit inflation target, although Bernanke did not touch on this specifically.

“My idea of being predictable is on the one hand to use benchmarks ... but also to provide information to the public what our outlook is, what our forecast is, how we see the risks and how we plan to respond.

“That communication, and providing adequate information, is really the only way to be adequately predictable in a world of uncertainty,” Bernanke said.

Bernanke was speaking from Washington before taking part in a meeting of the Group of Seven industrialized nations to review the outlook for the world economy, after violent market swings sparked by a credit crunch amid slumping U.S. housing.

The panel discussion in St. Louis was with St. Louis Fed President William Poole and former Under Secretary of Treasury for International Affairs John Taylor. The conference was in Poole’s honor, before he retires in March.

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Poole, a voting member of the Fed’s interest rate-setting committee this year, also emphasized predictability, but said that backing actions with deeds was also key.

“An important part of retaining credibility is to say what you are going to do, and then do it, unless you have very good explanations about why you are going to depart from what you said you were going to do,” he said.

The Fed surprised markets with an unexpectedly bold half percentage point cut in its target overnight funds rate to 4.75 percent on September 18, saying that it wanted to prevent the credit crunch from spreading and doing lasting economic harm.

The Fed holds its next policy meeting on October 30-31 and investors are split on whether it will lower borrowing costs by another quarter percentage point, or hold fire while it waits for more information on the performance of growth.

Poole said U.S. banks appeared to have weathered market woes and were continuing to lend, suggesting he felt the Fed’s actions had helped contain the problem.

“By and large the banks are well capitalized... They are taking some losses, but that is coming out of capital, so they are taking it out of the shareholders’ hides and that is the way it should be,” he said.

“In the current circumstance, banks are providing credit... They are coming through on their commitments to provide back-up lines of credit... That alleviates pressure in financial markets,” he added.

Additional reporting by Mark Felsenthal in Washington

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