ECB’s Trichet says still in market correction

Conferences

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“We still are in a market correction,” Trichet said at the Kansas City Federal Reserve Bank’s annual monetary policy conference that draws central bankers, economists and business people from around the world. “What has been done until now has been pretty well done, it seems to me, under those very difficult circumstances,” he said, responding from the conference audience to a paper critical of the reactions of the US Federal Reserve, the European Central Bank and the Bank of England to financial turbulence.

The annual conference took place as market and economic conditions remain gloomy amid persistent worries about bad credit, inflation, sluggish growth and high energy and commodity prices. “This turmoil is not going to go away quickly and will require serious efforts to overcome it,” a top official of the International Monetary Fund, John Lipsky, told Reuters.

The forum has focused on fallout from the financial crisis that erupted in 2007. In the conference keynote address on Friday, Fed Chairman Ben Bernanke said the year-long financial storm “has not yet subsided.” The US economy may hit another bump in the final months of the year as the boost to spending from the government’s $152 billion stimulus package wears off, a congressional budget official said on Saturday.

“The stimulus helped to support consumption in the middle part of this year,” Congressional Budget Office head Peter Orszag told Reuters. “One of the things we’ll be experiencing later this year is the withdrawal of that effect, leading to economic weakness.” Initial US government data reported last month showed the economy grew by an annual rate of 1.9% in the Q2, after meager growth of 0.9% in the Q1. At the symposium, a former Bank of England (BoE) official, Willem Buiter, took the BoE, the ECB and the Fed to task for their responses to the crises that began last summer as the extent of problems resulting from risky subprime mortgages -- loans made to borrowers with spotty records of repaying debts -- became known.

Buiter in a paper presented at the symposium directed his harshest critique at the Fed, saying the US central bank’s steep interest rate cuts to counter the crisis would lead to higher inflation. The Fed misjudged the effects of the housing contraction and overreacted by bringing benchmark rates down by 3.25 percentage points to the current 2% level, said Buiter, now a professor at the London School of Economics.

Fed Governor Frederic Mishkin, however, said the US central bank’s bold moves were justified to stop a vicious circle of shrinking credit and weakening economic activity. “When you can get an adverse feedback loop ... that argues that what you need to do is act more aggressively,” he said in response.

US inflation hit a 17-year high in July of 5.6%, driven by higher energy and food prices. Oil prices have declined since mid-July. The ECB, in contrast to the Fed, has raised rates, citing worries about record euro zone inflation. A European policy-maker said at the Fed conference it was premature to declare that falling oil prices would curb euro zone inflation. “We will have to see where it will go. It is too early to give a comment on that,” ECB governing council member Yves Mersch told Reuters.

Meanwhile, another paper said the European Union urgently needs a better plan to share the costs of dealing with large bank failures to prevent the risk of a severe “contagion effect.” Economists Franklin Allen and Elena Carletti said that without clearer guidelines, European and global capital markets could be at risk. (Reuters)

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