Still tight credit conditions and high unemployment are putting a damper on economic recovery even as "aggressive and extraordinary actions" by officials have brought financial markets back from the brink, a top Federal Reserve policymaker said on Wednesday.
"While circumstances have improved, they are still very far from where we want them to be," said William Dudley, president of the New York Federal Reserve Bank, in remarks to a meeting of the Partnership for New York City.
"We have no cause for celebration when the challenges facing so many businesses and households remain so daunting," he said.
In a speech that dealt largely with regulatory lessons from the recent financial crisis, Dudley defended the Fed's extraordinary response, saying it had been "critical in preventing the strains in our financial markets from resulting in even more severe damage to the economy."
"The prospect of a collapse of our financial system and a second Great Depression now seems extremely remote," he said.
The Fed — the U.S. central bank — cut benchmark U.S. interest rates to near zero in December 2008 and put in place an array of emergency lending and asset purchase programs to support the U.S. financial system and the broader economy.
The New York Fed president has a permanent voting seat on the Fed's monetary policy-setting panel.
Dudley acknowledged that some of the Fed's actions during the crisis — which included bailing out major financial institutions such as bank Bear Stearns and insurer American International Group — would, under normal circumstances, have been "unpalatable" but that officials had little choice.
"Faced with the choice between these otherwise unpalatable actions and a broader systemic collapse, the Fed, with full support of the Treasury, invoked its emergency lending authority and prevented the collapse of certain institutions previously considered to have been outside its safety net."
Dudley said that in hindsight, regulators probably should have sounded the alarm sooner on the vulnerabilities in the banking system and said a more comprehensive regulatory structure is needed to reflect the interconnected nature of financial markets and let regulators better connect the dots.
The Fed should play a key role in that structure, he added, due to its expertise and experience to oversee large, systemically important firms, payment and settlement systems and the U.S. capital markets.
As Congress mulls new legislation, Dudley said lawmakers should look dispassionately at what worked and what didn't, and warned them not to "throw the baby out with the bathwater."
He argued that it is not a good idea to strip the Fed of supervisory powers.
Monetary policy and supervision are linked, he said, and with information about financial markets collected through supervision, monetary policy is "more informed."
"In my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system," he said.
Dudley also pushed back against a proposal to audit the Federal Reserve.
He said that auditing monetary policy decisions would lead to politicization of the Fed and that its inflation-fighting ability would be impaired as a result.
He said that the notion that the Fed's financial dealings are currently kept secret was "simply incorrect."
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