Kohn defends Fed against moral hazard claims

Donald Kohn, the vice-chairman of the Federal Reserve, defended the Federal Reserve against claims that its monetary policy feeds moral hazard because its responses to booms and busts in asset prices are asymmetrical.

Speaking at the Bundesbank on Friday, Kohn said: "Federal Reserve policy makers have not been asymmetrical in intent or in actions, in that we have always focused sharply on the macro-economy. Asset prices have mattered in the determination of policy because they have mattered for our outlook."

The vice-chairman also discussed what he believes to be the best framework for monetary policy .

He said that his preferred framework:

• assigns the single instrument of monetary policy to its macroeconomic objective;
• relies on regulation to erect a resilient financial structure; and
• applies the tool of monetary policy to the macroeconomic task at hand, if market judgements prove to be wrong and financial prices adjust sharply.

Kohn said the Fed's 50 basis point cut on Tuesday could be seen as applying the tool of monetary policy to the macroeconomic task at hand.

To read Kohn's speech, click here