Fed needs better view on housing and stability link: Mester

[PHILADELPHIA] Seven years after the crisis triggered by the mortgage market, the Federal Reserve still needs a clearer understanding of how problems in housing might destabilize the US economy, a top Fed official said on Friday.

Cleveland Fed President Loretta Mester said that if the central bank wants to achieve its goals of stable inflation and full employment, it must be able to better quantify the effects that changes in household finance might have on the broader economy.

"More work needs to be done on the nexus between monetary policy and financial stability policy," Ms Mester said, including "determining the most effective way to address emerging risks to financial stability and developing models that can be used to evaluate how policymakers should incorporate financial stability concerns into monetary policymaking."

Speaking at a conference on consumer credit at the Philadelphia Fed, Ms Mester said so-called macroprudential tools like countercyclical capital buffers, capital conservation buffers, and stress test scenarios "show promise" but are"largely untested."

A collapse in the US mortgage market, reckless leveraged lending, Wall Street securitization, and lax regulations led to the 2007-2009 financial crisis that spawned a global recession.

The US economy is still recovering, though Ms Mester said improvements in household balance sheets "is one of the important fundamentals underlying the outlook for continued expansion, further improvement in labour markets, and inflation gradually moving back to the Federal Reserve's 2 per cent target over the medium term."

She did not directly discuss monetary policy.

REUTERS