Despite the recent wave of unconventional moves to help stabilize the U.S. economy, the Federal Reserve must maintain its independence and focus on the stability of the economy as a whole, rather than specific sectors or types of institutions, the Fed and the U.S. Treasury said in an unusual joint statement on Monday.
Actions that the Federal Reserve takes, during this period of unusual and exigent circumstances, in the pursuit of financial stability, such as loans of securities purchases that influence the size of its balance sheet, must not constrain the exercise of monetary policy as needed to foster maximum sustainable employment and price stability, the two-page statement said.
The unusual statement comes hours after Treasury Secretary Timothy Geithner unveiled the latest component of his plan to shore up the fragile financial system and a day ahead of testimony on Capitol Hill by both Geithner and Federal Reserve Board Chairman Ben Bernanke on the government's rescue of insurance giant AIG.
The Federal Reserve's expertise and powers are indispensable for preventing and managing financial crises, the Fed said.
And while the crisis continues, the Fed would not hesitate to continue to be creative in its response to the crisis.
As long as unusual an exigent circumstances persist, the Federal Reserve will continue to use all its tools working closely and cooperatively with the Treasury and other agencies as needed to improve credit markets and prevent the failure of a systemically important institution, they said.
In the longer term, however, the Treasury aims to remove from the Fed's balance sheet, or liquidate, the assets the U.S. central bank has taken on its efforts to assist American International Group and help JPMorgan buy Bear Stearns.
Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers, the statement said.
Government decisions to influence the allocation of credit are the province of the fiscal authorities, it added.
The statement follows criticism from some regional Fed presidents, including Philadelphia's Charles Plosser and Richmond's Jeffrey Lacker, that carrying non-traditional assets on the Fed's balance sheet could make the central bank more vulnerable to political pressure and risk its independence.
The Fed set up a holding company called Maiden Lane LLC in March 2008 to hold an asset portfolio JPMorgan said was too risky for it to take on in its fire-sale purchase of investment bank Bear Stearns.
When the Fed and Treasury first rescued insurer AIG in September, the Fed set up two more Maiden Lane facilities.
The Fed and Treasury also pledged to work with Congress to create new rules that would better prevent the failure of systemically critical financial institutions.
(Reporting by Corbett B. Daly and Kristina Cooke)