Fed's Kohn Defends Policies, Says Credit Risks Generally Small
By Michael R. Crittenden and Jeff Bater, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The credit risks taken on by the Federal Reserve
during the financial crisis have generally been "very small" and in line with
normal risk-taking by central banks, a top Fed official said Thursday.
Fed Vice Chairman Donald Kohn, appearing at the Brookings Institution in
Washington, acknowledged that the Fed did have to take on higher levels of
credit risk with the rescue of American International Group Inc. (AIG), its
dealings with Bear Stearns Cos., and in other instances. But while those
decisions were "very uncomfortable," they were not the status quo, he said.
"The credit risks we're taking are very, very small and in the nature of the
traditional risk that central banks take," Kohn said.
Broadly, he said it was essential that the public continues to have faith in
the central bank and that the Fed is committed to instilling that confidence.
Discussing interest rates, Kohn said he doubts that short-term interest rates
will rise much given the weakness of the global economy. Responding to a paper
analyzing U.S. monetary policy during the financial crisis, he disputed a
suggestion the central bank's credit policies, combined with payment of interest
on reserves, could bring adverse implications for its ability to conduct sound
monetary policy.
"This outcome seems extremely remote," he said in his remarks. "The Federal
Reserve's exposure to credit losses is quite limited."
Kohn said short-term interest rates would have to rise "very high, very
quickly" for interest on reserves to outweigh the interest the Fed is earning on
its longer-term asset portfolio.
"With the global economy quite weak and inflation low, a large and rapid rise
seems quite improbable," Kohn said.
-By Michael R. Crittenden and Jeff Bater, Dow Jones Newswires; 202-862-9273;
michael.crittenden@dowjones.com
(END) Dow Jones Newswires
09-10-091916ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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