It's time to change the Fed's mandate, says Morgan Stanley Asia Chairman Stephen Roach.
“Specifically, the U.S. Congress needs to alter the Fed’s policy mandate to include an explicit reference to financial stability,” Roach writes in the Financial Times.
“The addition of those two words would force the Fed not only to aim at tempering the damage from asset bubbles but also to use its regulatory authority to promote sounder risk management practices.”
It wouldn’t be first time Congress has refined the Fed’s mandate, Roach notes.
The Humphrey-Hawkins Act of 1978 required the Fed to add price stability to its original post-WWII policy target of full employment.
That move enabled former Fed Chairman Paul Volcker to contain double-digit inflation.
Roach believes that focusing on financial stability will force the Fed to both shift monetary policy from a reactive mode toward a pre-emptive one and allow it to become a much tougher regulator.
“There is no room in a new financial stability mandate for bubble denialists such as Alan Greenspan,” Roach says.
Fed Chairman Ben Bernanke recently showed no interested in altering the Fed’s guiding principles.
“The Federal Reserve has a dual mandate to promote stability and maximum sustainable growth and employment,” Fed Chairman Ben Bernanke said in a recent speech at the Economic Club of New York.
“That mandate is an appropriate mandate, and one we will continue to follow.”
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