Chairman Ben S. Bernanke
At the Fifth European Central Bank Central Banking Conference, The Euro at Ten: Lessons and Challenges, Frankfurt, Germany
November 14, 2008
Policy Coordination Among Central Banks
I am pleased to be here in Frankfurt today to celebrate the 10th anniversary of the euro. The euro’s introduction was a remarkable achievement. As an academic, I did a bit of consulting for the European Monetary Institute, the European Central Bank’s (ECB) predecessor, on monetary transmission mechanisms; I thus played a part, albeit an extremely small one, in this grand project. I mention this only as a reminder that the creators of the euro drew on monetary expertise from around the world, an early example of the international cooperation that has since proven to be one of the hallmarks of the ECB. Indeed, the run-up to the euro’s establishment and the experience of the past decade have been associated with an unprecedented degree of policy coordination among the sovereign states within the euro area, including cooperation in the areas of fiscal and regulatory policies as well as monetary policy.
The current financial crisis and global economic slowdown likewise have been an occasion for unprecedented international policy coordination, within Europe but also globally. For example, in its regulatory capacity, the Federal Reserve has worked closely with regulators and supervisors from a number of European nations, and we are active participants in the international Financial Stability Forum and the standard-setting bodies operating under the aegis of the Bank for International Settlements. My focus today, however, will be cooperation in monetary policy and, especially, in the meeting of the liquidity needs of our increasingly globalized financial markets.
As you know, financial markets remain under severe strain. The proximate cause of the financial turmoil was the end of the U.S. housing boom and the attendant losses on mortgages and mortgage-related assets by many institutions. However, more fundamentally, the turmoil was the product of a global credit boom, characterized by a broad underpricing of risk, excessive leverage by financial institutions, and an increasing reliance on complex and opaque financial instruments that have proven to be fragile under stress. The unwinding of this boom (and the associated financial losses) has led to the withdrawal of many investors from credit markets and deleveraging by financial institutions, both of which have acted to constrict available credit to households and businesses. This credit squeeze is, in turn, a principal cause of the economic slowdown now taking place in many countries.
Central bankers have been working closely together throughout this period of financial turmoil. Personally, I have found the opportunity to share views regularly with President Trichet and other leading central bankers at various international meetings extremely valuable. We are all in frequent contact by phone as well. Our consultations allow us to keep abreast of developments in other countries, to compare our analyses of developing trends, and to draw on each other’s experience and knowledge.
The merits of coordinated monetary policies have been discussed by policymakers and academics for decades, but in practice, such coordination has been quite rare. However, on October 8, the Federal Reserve announced a reduction in its policy interest rate jointly with five other major central banks--the Bank of Canada, the Bank of England, the ECB, Sveriges Riksbank, and the Swiss National Bank (SNB)--with the Bank of Japan expressing support. Last month’s joint action was motivated by the abatement of inflationary pressures and increased indications of economic slowing in our respective economies. In addition, the coordinated rate cut was intended to send a strong signal to the public and to markets of our resolve to act together to address global economic challenges.