The Federal Reserve pays close attention to the dollar, New York Federal Reserve Bank President Timothy Geithner said on Monday, and added that no central bank can afford to be indifferent to its currency.
Geithner was speaking at the Economic Club of New York, and his remarks came a few days after similar remarks from Fed Chairman Ben Bernanke, who drew links between a weaker dollar and higher import prices and consumer price inflation.
Geithner also said containing global inflation risks will probably require tighter monetary policy.
The Fed has cut U.S. interest rates sharply to 2 percent since September, though markets expect it to raise them later this year.
Geithner also said the current financial crisis has demonstrated that U.S. regulation needs substantial reform from its current confusing mix.
The reforms should be accompanied by global initiatives to make the financial architecture stronger across borders and better able to respond to crises that affect financial institutions far and wide, he said.
"The most fundamental reform that is necessary is for all institutions that play a central role in money and funding markets -- including the major globally active banks and investment banks -- to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity," Geithner said in his prepared remarks.
Geithner said regulatory reforms should mitigate and reduce need for future interventions, but that it was not realistic to attempt preemptively to diffuse pockets of risk and leverage.
"I do not believe that is a desirable or realistic ambition for policy.
It would fail, and the attempt would entail a level of regulation and uncertainty about the rules of the game that would offset any possible benefit," Geithner said.
"I do believe, however, that we can make the system better able to handle failure by making the shock absorbers stronger." Geithner said the current crisis exposed very significant problems in financial systems of the U.S. and other major economies and that innovation got too far in front of the knowledge of risk.
However, he said no financial system will be free of crises.
Derivatives Firms to Meet
According to Geithner, 17 firms representing 90 percent of the credit derivatives trading market will meet at the bank this afternoon.
"This afternoon, 17 firms that represent more than 90 percent of credit derivatives trading, meet at the Federal Reserve Bank of New York with their primary U.S. and international supervisors to outline a comprehensive set of changes to the derivatives infrastructure," Geithner said.
The meeting agenda also includes the creation of a central clearing house for credit default swaps.