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Financial stability should not become Fed's third mandate: Mester

The Federal Reserve building in Washington, D.C.
Kevin Lamarque | Reuters

Maintaining stability in financial markets should not be an explicit goal for the Federal Reserve, which should use interest rates to head off a crisis only if more precise and better-suited tools fail, a top Fed official said on Tuesday.

"If our macroprudential tools proved to be inadequate and financial stability risks continued to grow, I believe monetary policy should be on the table as a possible defense," Cleveland Fed President Loretta Mester said in remarks prepared for delivery in Sydney, adding that the Fed's key price stability and maximum employment goals usually align with its desire for a stable financial sector.

Mester is a voting member on Fed policy this year and has often warned that waiting too long to raise rates could create risks to financial stability. She did not use her speech in Sydney, however, to comment on her outlook for the U.S. economy or interest rate policy. Her remarks were focused on the financial system and were very similar to those she delivered on June 4 in Stockholm.

In the only notable departure from last month's speech, she nodded to the after the June 23 U.K. vote to leave the European Union.

The move, she said, tests the use of macroprudential tools since the financial crisis, but in this case rather than using them to reduce financial stability risks they are being used to support monetary policy goals, illustrating how closely linked monetary policy and financial stability policy are.

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