HANOVER, New Hampshire (Reuters) - Federal Reserve Governor Frederic Mishkin on Friday said the U.S. central bank is ready to act swiftly in the face of risks to the economy but is also ready to raise rates if inflation expectations become untethered.
“The Federal Reserve has been acting and will continue to act decisively, in the sense that our lowering of the federal funds rate target has reflected the evolution of the balance of risks to the macroeconomy,” he said in a speech at the Tuck School of Business Administration at Dartmouth College.
Mishkin said disruptions in financial markets pose substantial risks to the outlook for economic growth. Any adverse economic or financial news has the potential to cause further strains, he added.
The Fed cut rates abruptly by 1.25 percentage points to 3 percent in January in two steps in response to financial market turmoil and clear signs tight credit and the worsening housing downturn were slowing the economy.
The Fed’s actions were an attempt to move rapidly to limit the damage from financial instability, he said.
“Waiting too long to ease monetary policy by lowering the federal funds rate could adversely affect the confidence of households and firms. ... Waiting too long might also increase the overall amount of easing that would eventually be needed,” the Fed governor said.
Mishkin also cautioned that the central bank would watch carefully for any signs financial markets had begun to believe the Fed would tolerate higher levels of inflation while the economy recovers.
“The central bank must be ready to hold steady or even raise the policy rate if the evidence clearly indicates a significant rise in inflation expectations,” he said.
“While the current strains in financial markets are likely to persist for some time, there have been instances when financial markets have turned around quickly, and we must be prepared for such a possibility in this instance,” he added.
Another Fed initiative aimed at easing strains in credit markets, a series of cash auctions, appears to be accomplishing its intended goal, Mishkin said.
“Interest rates in term markets provide some evidence that the (term auction facility) may have had significant beneficial effects on financial markets,” he said.
Writing by Mark Felsenthal; Editing by Neil Stempleman