Turbulence buffeting global financial markets risks tipping economies into recession but policy makers must avoid overreacting to it for fear of making the situation worse, St. Louis Federal Reserve Bank President William Poole said on Thursday.
"Central banks have screwed up in the past," Poole reminded his audience after addressing a conference sponsored by the European Economics and Financial Centre.
"Historically, central banks have been the source of the disturbance rather than the solution," he added. "We have to make sure that we don't overreact."
He said the U.S. central bank has never taken a policy action "for the purpose of bailing out markets." The Fed has stepped in during periods of exceptional stress in the past, such as after the Sept. 11, 2001, terror attacks, to lower rates in order to give the economy a lift.
Poole is a voting member of the policy-setting Federal Open Market Committee that is scheduled to meet on Sept. 18 amid calls from market participants for the Federal Reserve to cut the federal funds rate.
Poole did not tip his hand on his vote but, in prepared remarks, stressed that the U.S. economy was operating near full employment and said policy makers needed to pursue polices that ensure both full employment and price stability.
Since mid-August, financial markets have been staggered by the impact of a rising defaults in U.S. subprime mortgage markets that have reverberated globally because many of the riskiest loans were packaged into securities and sold abroad.
Concern about who holds the securities has made lenders wary and threatened to seize up credit markets, forcing central banks to pump billions of dollars of funds into markets in order to maintain liquidity.
"I think the probability of recession is higher than it used to be," Poole conceded, adding that the Fed was monitoring conditions closely in the U.S. economy but that he didn't foresee a nosedive in activity.
The ratings agencies that assigned investment-grade quality to the mortgage-backed securities that were sold around the globe have emerged as a key target of investigation and Poole said questions about their role were appropriate.
"Ratings agencies don't mean anything if people don't trust them," he said. "There is a lot of discussion about how they can convince the market that they have changed the processes and they need to recover the reputation."
In his prepared remarks, Poole said U.S. hiring conditions were healthy and said he rejected the idea that globalization was a threat to U.S. jobs and economic prosperity.
"Most indicators suggest that the U.S. labor market is strong," Poole said, adding that a slower pace of U.S. job creation this year did not reflect a deteriorating economy.
"Rather than being a sign of a weakening economy, the recent slowdown in the rate of job creation is almost certainly related to a slowing of labor force growth as the baby-boom generation reaches retirement age," Poole said.
The U.S. unemployment rate has hovered around 4.5 percent since January and has been under 5 percent for much of the past two years, Poole said, adding "the economy seems to be operating near full employment."
The Labor Department is scheduled to release figures on August employment on Friday at 8:30 a.m. (1230 GMT). Economists polled by Reuters last week forecast 110,000 jobs were created but since then there have been signs on softer hiring in the services sector.
Poole said economic research did not support the idea that trade leads to job losses or to lower average wages and said that in fact average U.S. hourly earnings were rising after a four-year period in which there was no growth.
"A casual reading of the evidence indicates that the business cycle is far more important than trade in determining the rate at which the U.S. labor market is gaining or losing jobs," Poole said.
He said that while some U.S. industries have cut jobs because they cannot compete with cheaper-priced imports, the overall strength of the economy has made it possible for most workers to find other employment.
"The loss of manufacturing jobs, which has been occurring in the United States for decades, seems to have its roots in the growth of productivity rather than in the rise of imports," he said.
Poole called for increased assistance to help displaced workers find new jobs, saying that would be preferable to any bid to restrict imports and trade with the rest of the world.
"Rather than place further limitations on trade, which would surely hamper economic growth, policy-makers should make sure that workers who are displaced by trade receive the assistance they need in order to find new work." he said.