St. Louis Fed's Poole denies 'Fed put' from rate cuts |
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Fri, 30 Nov 2007 21:50
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WASHINGTON (Thomson Financial) - If the Federal Reserve is simply doing what it is supposed to do, trying to prevent the financial system from collapsing, then there is no 'Fed put,' moral hazard or market bailout when the Fed cuts rates, St. Louis Federal Reserve Bank President William Poole argued today.Inevitably, he said, 'Fed action to stabilize the economy--to cushion recession or deal with a systemic financial crisis--will have the effect of pushing up stock prices.'But the Fed should not avoid taking action to protect the economy because it might raise stock prices, nor, he argued, does it make any sense 'to let the economy suffer from continuing declines in stock prices for the purpose of 'teaching stock market speculators a lesson.''Poole was defending the Fed against its critics in a speech to the libertarian Cato Institute in Washington. His text was released to reporters.'The Fed does not have the desire or the tools to prevent widespread losses in a particular sector,' he said, 'but should not sit by while a financial upset becomes a financial calamity affecting the entire economy.'Right now, there is no doubt many investors in subprime securities will take heavy losses and the Fed is not trying to protect them. 'The issue,' Poole said, 'is not whether subprime paper will trade at 70 cents on the dollar or 30 cents, but that the paper in fact can trade at some market price determined by the usual market processes.'And he added, it is unfortunate that these principles and realities of monetary policy are 'unclear' to so many in the financial markets.dennis.moore@thomson.comdem/nullCOPYRIGHTCopyright Thomson Financial News Limited 2007. All rights reserved.The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
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St. Louis Fed's Poole says rate cuts will not be more than is needed UPDATE 