by Calculated Risk on 1/11/2006 05:41:00 PM

From Reuters: Fed must take asset prices into account on policy

U.S. monetary policy must take asset price fluctuations into account even if it cannot target them explicitly, New York Federal Reserve President Timothy Geithner said on Wednesday.

The comments set Geithner apart from others at the central bank who had been quicker to dismiss the impact of significant price rises in assets like stocks or housing.

Some economists worry that, like the stock market in the late 1990s, housing prices may haven gotten out of whack with the fundamental value of home assets after a five-year boom.

While some of his colleagues have argued that there is simply nothing the Fed can do about it, Geithner said action was indeed warranted under certain circumstances.

"When policy-makers have already witnessed a significant move in asset values and are confident in what that move means for the outlook, it (the Fed) should be prepared to adjust policy accordingly," Geithner told an economics luncheon at the Harvard Club.

Geithner also reiterated his concerns over the longer-term stability of the global financial system, saying that the calm of recent years should not be taken as a green light for complacency.

He said the U.S. current account deficit, and the eventual need for an adjustment, posed serious risks.

"It would be hard for anyone looking at the size of the U.S. current account deficit to not be worried," Geithner said.

Here is the text of Geithner' speech: Some Perspectives on U.S. Monetary Policy