NY Fed's Geithner on liquidity & financial markets

Large hedge funds, in particular, pose a unique challenge to policy-makers because of their secretive nature and use of multiple counterparties, Geithner said.

"Central banks cannot realistically hold out the prospect of using monetary policy to prevent asset bubbles, conditions of 'excess' leverage in parts of the financial system, or other factors in markets that might lead to the types of positive feedback dynamics that were at the heart of some past crises," he told a risk management conference.

He said that despite the importance of financial market liquidity to monetary policy, no indicators provide a "ready guide" to decisions on setting interest rates.

"Central banks need to stand prepared to make appropriate monetary policy adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of prices stability and sustainable economic growth," he said.

Speech by Timothy F. Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 8th Annual Risk Convention and Exhibition, Global Association of Risk Professionals, New York City, 28 February 2007.

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