Federal Reserve Bank of New York President William Dudley flagged the uneven recovery of the financial system Wednesday, in comments that also said central bank policy was aimed at trying to help that healing process continue.
“The capital markets have recovered” but “the banking system is still under quite a bit of strain,” Dudley said. For banks, “it is a healing process, it will take some time,” and that’s “one of the reasons why we have our monetary policy setting where it is,” Dudley said.
The official was speaking as part of a discussion held by Partnership for New York City. His comments followed formal remarks in which the policy maker argued attempts by Congress to audit the Fed’s monetary policy decisions and take away regulatory powers could ultimately make the institution less effective at helping the economy.
Dudley’s post speech remarks — he’s also vice chair of the interest rate-setting Federal Open Market Committee — were wide ranging.
The official said Fed efforts to bring Wall Street compensation in line with banks’ risk profiles were still ongoing. He noted it was “very unfair” to see so many bankers being well paid given high unemployment and bank bailouts. But the official added “there’s been a lot of movement in the right direction” and over time it appears likely compensation levels will be more appropriate.
Dudley also said he is cautious about attempts to separate banks from some of their riskier activities, and worried that putting certain activities outside the financial safety net will only push financial firms to go there, to avoid oversight.
What’s more, “I’d be careful to say hedge funds should be excluded from oversight” as they now are, Dudley said. While hedge funds were not the drivers of the current financial crisis “there’s no reason why they might not cause problems in the future,” which argues for oversight now.
Dudley also said when it comes to dealing with asset market bubbles that can cause greater economic stress, he’s less concerned about the difficult process of spotting trouble, than finding a way to deal with the problem.
The official said he’d like to see the development of tools that could address excessive leverage, or borrowing by participants in the financial sector. Leverage amplifies market up and downturns, and the reduction of this borrowing is a big reason explaining why financial markets have been under such stress.