--Poole: Auto sales drop most visible sign of econ uncertainty
--Poole: Equity drop, Calif. power woes signs of econ uncertainty
--Poole: Fed always faces risk of economy being pushed off track
--Poole: Timely policy changes can stabilize job, output growth
--Poole: US should clarify extent of guarantee for GSE liabilities
--Poole: Fed policy works best when mkts can predict Fed actions
By Deborah Lagomarsino, BridgeNews
New York--Jan. 18--St. Louis Federal Reserve Bank President William Poole said Thursday the nation's central bank faces "increased uncertainty" about the U.S. economy as the economic outlook now is more murky than it was just one or two months ago.
* * * "Even a casual reader of the newspapers these days knows that the outlook for the U.S. economy is less certain than it seemed only a month or two ago," Poole said in prepared remarks to the Risk Management Association in Memphis, Tennessee.
"Perhaps the single most visible sign of greater uncertainty is the reported decline in auto sales and production. Also highly visible are declines in equity prices since their peaks last March, publicity concerning problems faced by many of the dot-com companies and power problems in California," he said.
Poole, who votes on monetary policy this year, said the Fed faces "increased uncertainty at present" and said he spends a lot of time thinking about "how best to respond to the risks we face."
While the economic outlook has recently become more uncertain, Poole said "those of us who live and breathe monetary policy know that the uncertainties are always there."
In fact, Poole said policy makers always face the risk that "unexpected developments will tend to push the economy off track. In so far as possible, we need to design monetary policy with these risks in mind."
Poole said while there tends to be an assumption that the Federal Reserve has some "special insight" into the future that no one else has, "in fact, the Fed finds itself often surprised by shocks of various kinds."
The effects of shocks on the economy depend on how robust the financial system is, and Poole emphasized that "it is extremely important that we maintain a financial system that is able to withstand the inevitable shocks and surprises."
One such kind of surprise could be a policy response from the Fed, and Poole said he believes the Fed "should be as regular and predictable as the inherent uncertainties of the situation permit."
"When economic conditions appear to be changing rapidly, a policy response may well be appropriate. In this sense, the policy action may be a surprise from the perspective of what was anticipated several months earlier," he said.
Poole said he believes Fed policy works best "if markets fully understand the situation and therefore are able to predict Fed policy actions with a high degree of accuracy."
He said the Fed should rely on market forces "to create the desired effects."
"When market participants have confidence in the long-run outlook for inflation, as they have had for some years now, those participants will move interest rates in response to various pieces of information day by day," Poole said.
This way, the Fed can allow market interest rates to adjust without the central bank having to respond on a day by day or even quarter by quarter basis, he added.
While maintaining low and stable inflation is the most important monetary policy goal, Poole said the Fed can also contribute to reducing fluctuations of employment and output.
Timely adjustments in monetary policy "can indeed, within limits, help to stabilize employment and output growth."
But Poole cautioned that the central bank does not have the power to prevent all fluctuations in output and employment as trying too hard "could lead to destabilizing the inflation rate, which would create additional problems."
Turning to the issue of financial market soundness, Poole repeated that the United States needs to "make clear the extent" of federal guarantees for government sponsored enterprises (GSEs). Poole did not name them specifically, but these includes such housing-related entities as Fannie Mae and Freddie Mac.
While the debts of GSEs carry no explicit guarantee, the market prices these obligations "as if there is a federal guarantee," Poole said. "Should there be an unpredicted shock of some sort to one of these firms, the likely outcome is substantial market disruption as a consequence of the uncertainty over the government's role," he said. "Congress ought to examine carefully whether the GSEs are managing their affairs in a way that is consistent with the inherent risks they face," he said.
The issue of the implicit federal guarantee for GSEs surfaced earlier this year when Rep. Richard Baker, R-La., introduced legislation that sought to clarify the issue. The legislation never came close to passage and subsequently, Fannie Mae and Freddie Mac announced changes designed to satisfy Baker's concerns.
The issue could resurface with Republicans now in power on Capitol Hill the Treasury Department and with Baker having promised to seek further regulatory reforms. End
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