• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Markets should listen to central banks -Fed's Kohn

Posted on: Saturday, 27 August 2005, 10:15 CDT

JACKSON HOLE, Wyo (Reuters) - Federal Reserve Governor Donald Kohn said on Saturday financial markets should pay attention to U.S. central bank attempts to signal its policy attentions since this will make prices more accurate.

Still, he told a symposium organized by the Kansas City Fed, market participants should realize that policy-makers have imperfect knowledge of economic conditions.

"To the extent that the central bank can convey something useful about its intentions, markets that take account of these intentions will be priced more accurately," Kohn said.

"The risk is that private agents overestimate the ability or willingness of central banks to damp volatility in asset prices or the economy, or that they fail to appreciate that future policy actions depend on an imperfectly predictable economic outlook," he added.

Kohn suggested that a look at recent history should make investors aware of the risks they face.

"Investors have had an opportunity to observe that policy actions in 1987, 1998 and 2001-2003 cushioned the economy, but they did not stop major declines in the prices of equity in 1987 and 2001, or of risky credits in 1998," Kohn said.

He said there was a possibility that people perceive the economy as more stable than it is or believe central banks have more power than they really do to smooth the economy's path.

He said reminders to the public about the uncertainties in the economy "are appropriate and should have some effect."

Kohn said there was some question of whether the Fed, in its eight-times-a-year policy pronouncements that follow its rate-setting meetings, should be more explicit when it warns the public.

"The question is whether these warnings should be supplemented by actions to inject uncertainty into policy pronouncements by saying less than we can or into the economy by shifting our objectives away from seeking the best outcome for the economy over the intermediate term," Kohn said, making clear that he did not feel this was a good practice.

"In my view, such policies would result in less-accurate asset pricing, reduced public welfare on balance, and definitely be at odds with the tradition of policy excellence of the person whose era we are examining at this conference," he added.

The annual Rocky Mountain gathering was this year focused on a retrospective of Alan Greenspan's 18 years at the helm of the Fed. Kohn was a long-time senior Fed staffer before being elevated to Fed governor and has been close to Greenspan throughout his lengthy tenure.

Greenspan is due to step down at the end of January.

Source: REUTERS

More News in this Category