Fed's Kocherlakota: Fed Must Be Actively Engaged In Bank Supervision

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Minneapolis Federal Reserve President Narayana Kocherlakota said Tuesday that a healthy U.S. economy depends on a Federal Reserve that is actively engaged in bank supervision.

Speaking the Minnesota Bankers Association, Kocherlakota said that, while the economy appears to be recovering, the forecasts of a rebound will be tempered "because of uncertainties relating to various legislative initiatives and problems in the banking sector."

"First, there is a great deal of uncertainty related to major policy initiatives under consideration in Washington," he said in his first speech as Minneapolis Fed chief. "Congress is considering proposals for enormous changes in health care and in the structure of financial regulation. These proposals have generated a great deal of uncertainty."

He added, "I see this kind of political uncertainty as problematic for the prospects of rapid recovery."

Kocherlakota went on to say that the banking sector still faces ongoing problems that need to be remedied.

The Minnesota chief also commented on unemployment saying that he would be "surprised" - because of unemployment's historically slow recovery rate - if unemployment fell below 9 percent by the end of 2010, and below 8 percent by the end of 2011.

He added that one of the keys to lowering the unemployment rate is raising the hiring rate, something he doesn't see happening in the near future.

Kocherlakota then stressed that the Fed was only able to take actions to save the economy in the wake of the 2008 financial crisis because of "expertise and information it acquired as a supervisor of the nation's banks."

"My conclusion is that stripping the Federal Reserve of its supervisory role would needlessly put a Great Depression on the menu of possibilities for our country," he said, and later added that there would be no other institution in the government that would have the expertise to implement a stress test for large banks.

Kocherlakota said that the lending programs undertaken by the Fed - such as the Term Auction Facility - played an essential role in keeping solvent financial institutions in business during the crisis.

"It is clear to me that these policies worked as intended: They kept illiquid but solvent firms alive during the course of the financial crisis, while letting truly insolvent firms fail," he said. "In so doing, these policies eliminated the possibility of Depression 2.0."

Minneapolis Federal Reserve President Narayana Kocherlakota said on Tuesday that a healthy U.S. economy depends on a Federal Reserve that is actively engaged in bank supervision. Speaking before the Minnesota Bankers Association, Kocherlakota said that, while the economy appears to be recovering, forecasts of a rebound will be tempered "because of uncertainties relating to various legislative initiatives and problems in the banking sector." (Market News Provided by RTTNews)