EUROPEAN CENTRAL Bank (ECB) president Jean-Claude Trichet has defended the institution's responses to the financial turmoil that has shaken global markets for the past year and warned the turbulence is not over.
"We still are in a market correction," Mr Trichet said at the Kansas City Federal Reserve Bank's annual monetary policy conference in Jackson Hole, Wyoming, that draws central bankers, economists and business people from around the world.
"What has been done until now has been pretty well done, it seems to me, under those very difficult circumstances," he said, responding from the conference audience to a paper critical of the reactions of the US Federal Reserve, the ECB and the Bank of England to financial turbulence.
The conference took place as market and economic conditions remain gloomy amid persistent worries about tight credit lines, inflation, sluggish growth and high energy and commodity prices.
"This turmoil is not going to go away quickly and will require serious efforts to overcome it," said John Lipsky, a top official of the International Monetary Fund.
The forum has focused on fallout from the financial crisis which erupted in 2007.
In the conference keynote address on Friday, Fed chairman Ben Bernanke said the year-long financial storm "has not yet subsided".
The US economy may hit another bump in the final months of the year as the boost to spending from the government's $152 billion (€103 billion) stimulus package wears off, a congressional budget official said on Saturday.
"The stimulus helped to support consumption in the middle part of this year," said congressional budget office head Peter Orszag.
"One of the things we'll be experiencing later this year is the withdrawal of that effect, leading to economic weakness."
Initial US government data reported last month showed the economy grew by an annual rate of 1.9 per cent in the second quarter, after meagre growth of 0.9 per cent in the first quarter.
At the symposium, a former Bank of England official, Willem Buiter, took the Bank of England, the ECB and the Fed to task for their responses to the crises
Mr Buiter directed his harshest critique at the Fed, saying the US central bank's steep interest rate cuts to counter the crisis would lead to higher inflation. The Fed misjudged the effects of the housing contraction and overreacted by bringing benchmark rates down by 3.25 percentage points to the current 2 per cent level, said Mr Buiter, now a professor at the London School of Economics.
Fed governor Frederic Mishkin, however, said the US central bank's moves were justified to stop a vicious circle of shrinking credit and weakening economic activity.
"When you can get an adverse feedback loop . . . that argues that what you need to do is act more aggressively," he said in response.
US inflation hit a 17-year high in July of 5.6 per cent, driven by higher energy and food prices. Oil prices have fallen since mid-July.
The ECB, in contrast to the Fed, has raised rates, citing worries about record euro-zone inflation.
A European policymaker said it was early to say falling oil prices would curb euro-zone inflation.
"We will have to see where it will go. It is too early to give a comment on that," ECB governing council member Yves Mersch said.
Meanwhile, another paper noted the EU needs a better plan to share the costs of large bank failures to prevent the risk of a severe "contagion effect". Economists Franklin Allen and Elena Carletti said that without clearer guidelines, European and global capital markets could be at risk.
- (Reuters)
