Best not to use U.S. rates for financial stability: Fed’s Mester

The Federal Reserve should only resort to using interest rates if other more precise tools fail to head off financial instabilities that could harm the U.S. economy in the future, a top Fed official said on Saturday.

In a weekend speech in Stockholm, Cleveland Fed President Loretta Mester did not address the central bank’s pending decision to raise interest rates. Rather she repeated her argument that monetary policy should remain focused on employment and inflation and steer clear of attempting to prick risky asset bubbles.

“If our macroprudential tools proved to be inadequate and financial stability risks continued to grow, I believe monetary policy should be on the table as a possible defense,” she said in prepared remarks, adding that the Fed’s key price stability and maximum employment goals usually align with its desire for a stable financial sector.

Mester is a voting member on Fed policy this year.

Giving the central bank an effective third mandate has won more adherents since the 2007-2009 financial crisis, which some blame in part on too-easy U.S. monetary policy in the preceding years that allowed risks to take root.

As the Fed approaches a potential rate hike as soon as this summer, one reason to act sooner than later is to head off any brewing instabilities in risky corners of financial markets such as commercial real estate, where high valuations have attracted some recent concern.

So far the Fed’s approach has been to use financial regulations and supervision of banks and other firms – so-called macroprudential tools – to head off any emerging risks. “Financial stability should not be added as a third objective for monetary policy,” said Mester.

Source: Reuters