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Tue, Jan 05, 2010 - Page 10 News List

Bernanke to keep ‘open mind’ on policy

REMAINING CAUTIOUSWhile backing a strengthened regulatory system, the Fed chairman said he would remain open to using monetary policy to pop any bubbles

AFP , WASHINGTON

The US Federal Reserve chief backed a strengthened regulatory system as the key method to prevent a repeat of the financial crisis on Sunday, but said monetary policy could help pop future speculation bubbles.

In a speech in Atlanta, Fed Chairman Ben Bernanke offered little hint at a short-term change in interest rates, arguing that any revision in monetary policy should be done “cautiously,” but said the US central bank should be open to raising interest rates.

“All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis and to cushion the effects if another crisis occurs,” Bernanke told the American Economic Association in a speech. “However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks — proceeding cautiously and always keeping in mind the inherent difficulties of that approach.”

“Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward,” he said.

The crisis — which swelled in September 2008 with a near-meltdown on Wall Street and provoked a global recession — was “very possibly ... the worst in modern history,” Bernanke said.

Also speaking at the event in Atlanta, Federal Reserve Vice Chairman Donald Kohn said he was weighing “the potential costs and uncertainties associated with using monetary policy” to fight speculative bubbles.

“We now need to reexamine, with open minds, whether conventional monetary policy should be used in the future to address developing financial imbalances,” Kohn said. “Monetary policy is a blunt instrument. Increases in interest rates damp activity across a wide variety of sectors, many of which may not be experiencing speculative activity.”

He warned: “If higher rates just weaken output and inflation without damping speculation, the economy could be even more vulnerable when the speculative bubble bursts.”

Bernanke for his part said increases in interest rates in 2003 or 2004 were “sufficient to constrain the bubble, [but] could have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established.”

The Fed has stood accused of having fueled the housing bubble with extremely low interest rates, that encouraged many households to incur debt, often well beyond their financial means. The bubble burst in 2008 and the subsequent crisis brought the global economy to its knees.

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