Fed's Plosser Says Central Banks Must Exercise Caution as Lenders of Last Resort

Philadelphia Fed President Charles Plosser said the Federal Reserve must follow rules and exercise caution as a lender of last resort.

Speaking at the Society for Financial Econometrics Inaugural Conference in New York, Plosser said benchmarks may be needed to properly determine situations that qualify as system risks and that price stability is key to economic growth.

"I do believe...that lender of last resort policies should take a lesson from what we have learned from the theory of monetary policy," he said. "In particular, policies should have important rule-like features."

He said interventions to calm the markets run the risk of moral hazard and inhibited price discovery.

The comments echoed those from the Richmond Fed President Jeffrey Lacker earlier in the morning.

In his speech in London, Lacker said he called on the Fed to detail its rules on intervening in the financial markets in order to minimize moral hazard and greater risk taking.

"More expansive boundaries could conceivably prevent more avoidable liquidation costs in the case of non-fundamental runs, but in the case of fundamental runs more distortions would result," he said. "In addition, supervision itself is a costly endeavor, both in direct resource use and in the fallout effects on economic allocations."

By Stephen Huebl and edited by Cristina Markham