reality-based educator

WASHINGTON (MarketWatch) -- The Federal Reserve might not have to resort to a cut in its target federal funds rate to address the financial market turmoil and credit crunch, said Philadelphia Federal Reserve Bank president Charles Plosser on Saturday.

"I believe disruptions in financial markets can be addressed using the tools available to the Fed without necessarily having to make a shift in the overall direction of monetary policy," Plosser said in a speech prepared for delivery to the Pennsylvania Association of Community Bankers meeting in Hawaii. A copy of his remarks was released here.

Plosser said the Fed can continue to provide liquidity in the face of financial shock. On Aug. 17, the Fed cut its discount rate and has taken a series of technical moves to provide the market with cash. The Fed has also undertaken a series of injections of funds in to the market.

Many Fed watchers believe the Fed district bank presidents are more reluctant to cut the federal funds rate than the members of the Fed board of governors.

In the past few days, some bank presidents have stressed that the Fed must avoid the "moral hazard" problem by bailing out investors who took excessive risk.

Plosser put it this way: "It is not appropriate for the Fed to ensure against financial volatility per se, or against individuals or firms taking losses or failing."

Plosser suggested that he is not yet certain whether the tight credit and financial turmoil is a "temporary disturbance" that would not throw the economy off track or a "shock" that would require a rate cut.

"I believe it is important to understand and appreciate this underlying stability of the economy in the face of temporary disturbances as we seek to assess monetary policy in the face of developments in housing," Plosser said.

"The FOMC continues to monitor incoming data and other economic information for signs that these disruptions are having a broader impact on the economy," he said.

// posted by Reality-Based Educator @ 5:19 PM