Fed may need to adjust policy framework to respond to financial shocks: Rosengren

Federal Reserve policymakers should consider adjusting the central bank`s monetary policy framework to strengthen the tools available in the event of a future substantial hit to the economy, Boston Federal Reserve President Eric Rosengren said on Friday.

"Now should be the time that policymakers carefully... assess which tools could provide more potent buffers to draw upon should a large adverse financial shock occur," Rosengren said in remarks prepared for delivery to a monetary policy conference organised by the U.S. central bank in Washington.

There should be a more prominent consideration of financial stability policy tools, such as requiring banks to add further capital during good times, he said.

"With asset valuations high, a non-zero countercyclical capital buffer can in my view be justified. ... The case is even stronger in the U.S. if one considers that should a shock occur, monetary policy and fiscal policy may not be expected to respond as forcefully as they did," Rosengren said.

The Boston Fed chief largely steered clear of a discussion of the economic outlook in his remarks, but he said labour market tightness was beginning to feed through into modest increases in wages and inflation, and a more rapid rise in asset prices.

His comments come two days after policymakers voted to raise interest rates by a quarter percentage point in light of the strength of the economy and signalled bolstered confidence for the months ahead.

The Fed has now raised rates six times since it began a tightening cycle in late 2015, with the pace of hikes having quickened to three rate rises last year. The Fed forecasts three total rate hikes for 2018.

In his speech, Rosengren said it was precisely because of the current health of the economy that planning for a future adverse shock should occur.

He added that with the neutral rate of interest - a level that is neither expansionary nor contractionary - having fallen in the United States, the Fed would have less space to cut interest rates in any future crisis.

Fiscal policy buffers were also being diminished as the ratio of government debt to GDP has been rising in the United States, he cautioned.

"My view is that U.S. fiscal policy we have seen since the crisis emerged in 2008 will simply give future policymakers less flexibility to respond," Rosengren said.

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