St. Louis Fed's Poole denies 'Fed put' from rate cuts UPDATE

St. Louis Fed's Poole denies 'Fed put' from rate cuts UPDATE

	Published : Fri, 30 Nov 2007 23:57 By : Agencies Print this Story

(updates with Q&A)

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.

In a wide-ranging discussion during and after his formal remarks, Poole said he has not seen any significant change in inflation expectations since the Fed's October meeting.

'It really hasn't changed very much,' he said.

Poole also said he believes the equity markets and the Fed itself often have a certain 'equilibrium' in monetary policy expectations, which he said is due good transparency in the information used to make monetary policy decisions, and a good understanding of how the Fed uses this information.

However, Poole declined to answer whether he sees a strong equilibrium between the market and the Fed today, given the market's expectation of a rate cut of at least a quarter-point cut. He said he does not believe in forecasting the Fed's vote because new data can arrive at any time and change the overall economic forecast.

'We are surprised all the time,' he said.

However, Poole did allow that economic conditions have deteriorated somewhat from October. 'Conditions right now are not the same as they were in October,' he said.

Elsewhere, Poole said he does not believe the mandate of Fannie Mae and Freddie Mac should be expanded. His short answer was in response to a question about Fed Chairman Ben Bernanke's comment last month that these companies should be allowed to buy higher-value mortgages -- worth as much as 1 mln usd -- as a way of providing liquidity to the mortgage market.

He also said the Fed should not concern itself with exchange rates, and said his 'strong preference' is to let the market set currency rates.

On the housing crisis generally, Poole said there should be some way to help struggling borrowers stretch out their mortgage payments as a way of avoiding a wave of foreclosures, but said only that some creative way forward should be found, and did not offer a specific plan.

dennis.moore@thomson.com

dem/pik/wash

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