Fri, Oct 11, 2002 page12

• US Fed moves for the economy, not for stock market

  • BLOOMBERG
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  The Federal Reserve can't use interest-rate policy to adjust stock prices, Fed Vice Chairman Roger Ferguson said.

  "Monetary policy cannot appropriately be targeted to benefit one industry, region or economic group," Ferguson told the Bond Market Association meeting in New York.

  The link between Fed policy and stocks ``is too remote and indirect, and the impact of equity prices on the balance of aggregate supply and demand is too uncertain, for those prices to be a target of policy,'' he said.

  

  A trader watches the monitors at the New York Stock Exchange on Wednesday. Prices on Wall Street declined sharply, with the Dow hitting a five-year low.

  PHOTO: AP

  Ferguson didn't directly address the state of the US economy or Fed policy. In the context of a 32 percent decline in the S&P index of 500 stocks this year and Wednesday's drop in shares on the New York Stock Exchange, the broadest in four years, his comments suggest investors shouldn't expect moves in stocks to trigger interest-rate cuts.

  Central bankers, in a 10-2 vote last month, decided to hold the overnight bank lending rate at a 41-year low of 1.75 percent.

  In a statement accompanying the decision, the Fed said that while some areas of the economy were holding up well, weak employment and production, as well as "heightened geopolitical risks" may be a drag on the economy's recovery from recession.

  Fed Governor Edward Gramlich and Dallas Federal Reserve Bank President Robert McTeer, dissented, voting instead to cut the overnight rate for the first time since December. The unusual double dissent, combined with statistics released last week that showed unexpected declines in manufacturing, has led investors to bet the Fed would reduce interest rates by the end of the year.

  Ferguson suggested that pushing the overnight rate down to its current level in 11 reductions last year is likely to eventually boost economic growth. "Of course, monetary policy does work; but the lags continue to be unpredictable," he said.

  Investors also shouldn't take the Fed's recent statement about risks to the recovery as a sign of likely future rate reductions, he said.

  "The balance-of-risks statement does not itself predict the future course of monetary policy but rather provides the committee's assessment of the risks to good economic performance going forward," Ferguson said.

  "It is up to investors to draw out the expected path of short-term interest rates, looking primarily to incoming data and changed forecasts of the real economy," he said.

  Ferguson's remarks on stocks echoed those of other central bankers. For example, Fed Chairman Alan Greenspan said in August that he and his Fed colleagues couldn't have prevented the 1990s stock market bubble because raising interest rates to control share prices might have sent the economy into recession.

  "No low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble," Greenspan said in a speech to the Kansas City Federal Reserve Bank's annual economic conference in Jackson Hole, Wyoming.
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