Fed's Mester: better to separate stability, monetary policymaking

BOSTON (Reuters) - Policymakers aiming at financial stability should follow the tenets of good monetary policymaking, a top Federal Reserve official said on Friday, but should probably conduct each type of policymaking separately.

Both types of policymaking should be governed by clear and simple rules that can be easily understood, Cleveland Federal Reserve Bank President Loretta Mester said in remarks prepared for delivery to a conference in Boston. But policymakers should also keep in mind that policies aimed at thwarting financial instability can slow the very economic growth that monetary policy aims at nurturing.

"If effective monetary policy means taking away the punch bowl just as the party gets going, then effective financial stability policy might mean taking away the punch bowl before the guests have even arrived because the risks to financial stability build up over time and action likely needs to be taken earlier in order to be effective," Mester said. "(I)t might behoove policymakers to consider whether it would be better for central banks to keep their monetary policy and financial stability policy discussions separate so as to avoid jeopardizing the independence of monetary policy."

Central bankers globally have struggled to find the right balance between managing risks to financial stability and promoting a healthy level of inflation and growth.

With U.S. interest rates near zero for almost seven years, an increasing number of Fed policymakers have raised concern about investor risk-taking and possible asset bubbles, and have suggested that raising rates soon could tamp down those threats.

Mester did not take up the Fed's dilemma directly, but did say that once stability risks rise high enough, the goals for monetary policymaking and financial stability become more closely aligned. It was not clear, however, whether she believes the United States has reached that point.

Mester will rotate into a voting spot on the Fed's policy-setting panel next year. She said earlier this week that she believes the U.S. economy can handle an interest rate hike this year.

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