The weak U.S. housing sector warrants close attention to assess the economic outlook as well as its recent disruptive effects on financial markets, Philadelphia Federal Reserve Bank President Charles Plosser said on Saturday.
But Plosser, speaking at the Pennsylvania Community Bankers Association Convention in Hawaii, said it was not the U.S. central bank's job to protect individuals and firms from taking risks. A copy of his remarks was made available in advance.
The Fed does not seek to remove volatility from the financial markets or to determine the price of any particular asset; our goal is to help financial markets function in an orderly manner, he said.
Policy-makers must be careful to allow the marketplace to make necessary corrections in asset prices, he said, adding that a failure to do so would ultimately increase risks to the financial system.
Plosser said that the drag in the housing sector would likely diminish gradually, but continue until sometime next year.
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He also said he expected U.S. economic growth to return toward trend later in 2008, but there was considerable uncertainty surrounding the forecast.
Plosser will be a voting member of the Federal Open Market Committee in 2008. The FOMC is set to meet on September 18 amid growing expectations the Federal Reserve will cut rates to forestall economic weakness stemming from recent financial market turmoil.
A squeeze in global credit conditions that surfaced in mid-August prompted the Fed to provide extra liquidity to the money markets, and also to lower the discount rate on August 17.
Plosser said measures to provide ample liquidity during times of financial stress may help limit spillover effects into the broader economy, without changing interest rates.
However, financial shocks that lead to substantial and sustained reassessments of the economic outlook may prompt the Fed to change monetary policy, he said.