Fed's Mester: Rate Policy a Back-up Tool To Combat Financial Instability

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Monetary policy should be "on the table" as a possible defense against financial instability but only if regulatory tools prove inadequate, said Loretta Mester, the president of the Cleveland Fed, on Friday. Before the financial crisis, the general approach of the Fed was to mop up the consequences of a correction after the fact, but in a speech in Washington, Mester said the Fed must be "open to taking offsetting action should imbalances develop." The Fed is not simply on a hunt for potential asset bubbles, she said. "The central bank needs to assess whether the risk of macroeconomic and financial system instability has risen, not whether there's a bubble," Mester said. The Cleveland Fed president said the "jury is still out" on how effective new cyclical regulatory tools aimed at mitigating systemic risk will be.

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